Spurious Product Differentiation: A Drug on the Market

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Chapter 7: Product Differentiation and Monopolistic Competition

Consumers often believe that similar products differ in quality even when the products are physically identical. Some economists say such goods have spurious product differentiation. An example commonly offered is over-the-counter drugs. A consumer may form a false belief that one aspirin brand is superior to another after it relieves a mild headache and the (chemically identical) so-called inferior brand does not relieve a more serious one. Experiments show that even a placebo achieves a headache relief rate of about 45 percent compared to a relief rate of around 80 percent for actual aspirin. For some people, headaches go away by themselves, or the psychological effect of a placebo is sufficient to relieve their headaches. Of course, if a consumer believes that a product is more effective and that belief indeed makes the product work better (the placebo effect), then it is not appropriate to call this product differentiation "spurious."

Chemical tests of different aspirin brands indicate that most are virtually identical in aspirin content and rate of dissolution. Indeed, the judge in the Federal Trade Commission's case against the makers of Bayer aspirin, who claimed that Bayer was the best aspirin (being faster and gentler), concluded that Bayer was neither qualitatively nor therapeutically superior. Yet consumers apparently believe Bayer's claims. Although there are more than 400 brands of plain aspirin, Bayer is the best selling, even though it is relatively expensive.

Similar examples exist for many drugs. The manufacturer of the well-known name brand claims that its drug is safer or more effective, perhaps because of better filler materials or stricter quality control. Comparative studies, however, often fail to find these quality differences. Nonetheless, the name brand sells at prices much higher than those of generic brands. For example, Consumers Union found that Tylenol No. 3 costs 2.2 times as much as generic acetaminophen with codeine. Valium sells for 3.2 times as much as its generic equivalent, diazepam. On the other hand, at least in the San Francisco area, Amoxil (an antibiotic for infections) sells for only 1 percent more than its generic substitute. Over time, generics' share of the market has increased. In 1998, generic drugs accounted for 42.1 percent of all dispensed prescriptions, an increase of 9.7 percentage points from six years earlier.

Experiments have been conducted to determine if consumers' buying decisions are based on name recognition and not the product itself. Blind tests of consumers' preferences after use do not replicate market shares. In addition, the experimental market shares vary according to whether products are labeled with brand names. That is, consumers cannot always tell similar products apart and would not buy one product instead of another in the absence of brand names.

Sources:
Food and Drug Administration. 1977. "Proposed Monograph for OTC Internal Analgesic, Antipyretic, and Antirheumatic Products." Federal Register 42 (July 8): 353-82; Consumers Union. 1982. "Is Bayer Better?" Consumer Reports 47 (July): 347-9; Consumers Union. 1987. "The Big Lie About Generic Drugs." Consumer Reports 52 (August): 480-5; Center for the Study of Services. 1988. "Prescription Drugs." Bay Area Consumers' Checkbook 43 (Summer): 37-41; McConnell (1968); Monroe (1976); and "Old Drugs, New Labels." New York Times, June 13, 1998:B1, B2.

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