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The Unexpected Consequences of Generic Entry

Author

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  • Micael Castanheira De Moura
  • Carmine Ornaghi
  • Georges Siotis
Abstract
Generic drugs are sold at a fraction of the original brand price. Yet, generic entry typically produces a drop in the quantity market share of the molecule losing exclusivity. This effect is economically and statistically significant for a large dataset covering hundreds of prescription drugs sold in the US during the period 1994Q1-2003Q4. This paper proposes the first systematic analysis of what appears to be a market anomaly.We propose a model to characterize the market equilibrium before and after generic entry. We identify precise conditions under which entry reduces the quantity market share of the molecule. Intriguingly, this is more likely to occur when the remaining patent-protected molecules feature low horizontal differentiation. We test this and other theoretical predictions of the model and find they are validated empirically.

Suggested Citation

  • Micael Castanheira De Moura & Carmine Ornaghi & Georges Siotis, 2019. "The Unexpected Consequences of Generic Entry," Working Papers ECARES 2019-21, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:eca:wpaper:2013/293928
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    Cited by:

    1. Amaral-Garcia, S.;, 2022. "Medical Device Companies and Doctors: Do their interactions affect medical treatments?," Health, Econometrics and Data Group (HEDG) Working Papers 22/10, HEDG, c/o Department of Economics, University of York.
    2. Farasat A.S. Bokhari & Weijie Yan, 2020. "Product line extensions under the threat of entry: evidence from the UK pharmaceuticals market," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2020-04, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    3. Ilaria Natali & Mathias Dewatripont & Victor Ginsburgh & Michel Goldman & Patrick Legros, 2023. "Prescription opioids and economic hardship in France," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 24(9), pages 1473-1504, December.
    4. Anton‐Giulio Manganelli, 2021. "Reverse payments, patent strength, and asymmetric information," Health Economics, John Wiley & Sons, Ltd., vol. 30(1), pages 20-35, January.
    5. Siotis, Georges & Ornaghi, Carmine & Castanheira, Micael, 2019. "Market Definition and Competition Policy Enforcement in the Pharmaceutical Industry," CEPR Discussion Papers 14035, C.E.P.R. Discussion Papers.
    6. Georges Siotis & Carmine Ornaghi & Micael Castanheira, 2023. "Evolving market boundaries and competition policy enforcement in the pharmaceutical industry," European Journal of Law and Economics, Springer, vol. 55(2), pages 313-348, April.
    7. Herz, Benedikt & Mejer, Malwina, 2021. "The effect of design protection on price and price dispersion: Evidence from automotive spare parts," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    8. Herz, Benedikt & Mejer, Malwina, 2020. "The effect of design protection on price and price dispersion: Evidence from automotive spare parts," MPRA Paper 109645, University Library of Munich, Germany, revised 01 Sep 2021.
    9. Sofia Amaral-Garcia, 2020. "Medical Device Companies and Doctors: Do their Interactions Affect Medical Treatments ?," Working Papers ECARES 2020-18, ULB -- Universite Libre de Bruxelles.
    10. Higgins, Matthew J. & Yan, Xin & Chatterjee, Chirantan, 2021. "Unpacking the effects of adverse regulatory events: Evidence from pharmaceutical relabeling," Research Policy, Elsevier, vol. 50(1).
    11. Dubois, Pierre & Majewska, Gosia, 2022. "Mergers and Advertising in the Pharmaceutical Industry," CEPR Discussion Papers 17658, C.E.P.R. Discussion Papers.
    12. Ziemowit Bednarek & Jacqueline Doremus & Sarah Stith, 2021. "U.S. Cannabis Laws Projected to Cost Generic and Brand Pharmaceutical Firms Billions," Working Papers 2102, California Polytechnic State University, Department of Economics.
    13. Siotis, Georges & Lipatov, Vilen & Neven, Damien, 2019. "Dominance and the pre-emption of competition following the Servier and Paroxetine GSK judgments," CEPR Discussion Papers 14019, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Non-Price competition; Pharmaceutical industry; Generic entry; Consumer choice;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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