IDEAS home Printed from https://ideas.repec.org/a/wly/hlthec/v30y2021i8p1910-1932.html
   My bibliography  Save this article

Are drug prices subject to creative destruction? Evidence from the US, 1997–2017

Author

Listed:
  • Frank R. Lichtenberg

Abstract

There are several types of pharmaceutical competition. In addition to competition among producers of the same chemical substance (“within‐substance competition”), there may be competition among producers of different chemical substances in the same chemical subgroup (“between‐substance competition”). There have been numerous econometric studies of the effect of within‐substance competition on drug prices, but empirical evidence about the effect of between‐substance competition is far more limited. The primary objective of this study is to assess the impact of the entry of new drugs in a drug's therapeutic class on branded drug prices, generic drug prices, and the generic market share, using publicly‐available US data for the period 1997–2017. Two methods are used to estimate the effects of between‐substance and within‐substance competition on those variables. The first method is standard 2‐way fixed effects estimation based on aggregate data. The second method, based on micro data, is estimation using the DID_MULTIPLEGT procedure developed by de Chaisemartin et al. (2021), which does not rely on, and allows us to test for, “parallel trends.” Between‐substance competition does not appear to have any effect on brand‐name drug prices, although our inability to fully account for rebates may bias the estimates towards zero. (There is also little evidence for an effect of within‐substance competition on brand‐name drug prices.) However, between‐substance competition has a significant negative effect on generic drug prices. We estimate that the 1985–2005 increase in the number of substances ever registered in a drug's ATC4 chemical subgroup reduced the 2017 price of generic drugs by 42%. (The ratio of the generic‐price reduction attributable to rising between‐substance competition to the generic‐price reduction attributable to rising within‐substance competition also happens to be 42%.) A striking finding is that the entry of imitators has no effect on the prices of brand‐name drugs, but the entry of innovators has a significant negative effect on the prices of generic drugs in the same ATC4 chemical subgroup. In addition, between‐substance competition has a significant positive effect on the generic market share: the 1985–2005 increase in the number of substances ever registered in a drug's ATC4 chemical subgroup increased the 2017 generic market share by 15.0 percentage points. Due to its effects on generic drug prices and the generic market share, the 1985–2005 increase in between‐substance competition reduced the average 2017 price of drugs that were already sold in 1997 by 35%. We estimate that 36% of 2017 expenditure on drugs that were first registered during 1986–2005 was offset by reduced 2017 expenditure on drugs that were sold in both 1997 and 2017.

Suggested Citation

  • Frank R. Lichtenberg, 2021. "Are drug prices subject to creative destruction? Evidence from the US, 1997–2017," Health Economics, John Wiley & Sons, Ltd., vol. 30(8), pages 1910-1932, August.
    • Handle: RePEc:wly:hlthec:v:30:y:2021:i:8:p:1910-1932
    DOI: 10.1002/hec.4283
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/hec.4283
    Download Restriction: no
    File URL: https://libkey.io/10.1002/hec.4283?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. J. Gregory Sidak & David J. Teece, 2009. "Dynamic Competition In Antitrust Law," Journal of Competition Law and Economics, Oxford University Press, vol. 5(4), pages 581-631.
    2. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 75-90, March.
    3. Clément de Chaisemartin & Xavier D'Haultfœuille, 2020. "Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects," American Economic Review, American Economic Association, vol. 110(9), pages 2964-2996, September.
    4. Claycombe, Richard J., 2000. "The effects of market structure on prices of clothing and household furnishings," International Journal of Industrial Organization, Elsevier, vol. 18(5), pages 827-841, July.
    5. William M. Emmons III & Robin A. Prager, 1997. "The Effects of Market Structure and Ownership on Prices and Service Offerings in the U.S. Cable Television Industry," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 732-750, Winter.
    6. Ameet Sarpatwari & Jonathan DiBello & Marie Zakarian & Mehdi Najafzadeh & Aaron S Kesselheim, 2019. "Competition and price among brand-name drugs in the same class: A systematic review of the evidence," PLOS Medicine, Public Library of Science, vol. 16(7), pages 1-14, July.
    7. Regan, Tracy L., 2008. "Generic entry, price competition, and market segmentation in the prescription drug market," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 930-948, July.
    8. Granlund, David & Bergman, Mats A., 2018. "Price competition in pharmaceuticals – Evidence from 1303 Swedish markets," Journal of Health Economics, Elsevier, vol. 61(C), pages 1-12.
    9. Melnick, Glenn A. & Zwanziger, Jack & Bamezai, Anil & Pattison, Robert, 1992. "The effects of market structure and bargaining position on hospital prices," Journal of Health Economics, Elsevier, vol. 11(3), pages 217-233, October.
    10. Jovanovic, Boyan & Yatsenko, Yuri, 2012. "Investment in vintage capital," Journal of Economic Theory, Elsevier, vol. 147(2), pages 551-569.
    11. Katja Seim & V. Brian Viard, 2011. "The Effect of Market Structure on Cellular Technology Adoption and Pricing," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 221-251, May.
    12. Z. John Lu & William S. Comanor, 1998. "Strategic Pricing Of New Pharmaceuticals," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 108-118, February.
    13. Grabowski, Henry G & Vernon, John M, 1992. "Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 331-350, October.
    14. Steven N. Wiggins & Robert Maness, 2004. "Price Competition in Pharmaceuticals: The Case of Anti-infectives," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 247-263, April.
    15. Frank R. Lichtenberg & Tomas J. Philipson, 2002. "The Dual Effects of Intellectual Property Regulations: Within- and Between-Patent Competition in the U.S. Pharmaceuticals Industry," Journal of Law and Economics, University of Chicago Press, vol. 45(S2), pages 643-672.
    16. Frank R. Lichtenberg, 2014. "The Impact of Pharmaceutical Innovation on Disability Days and the Use of Medical Services in the United States, 1997-2010," Journal of Human Capital, University of Chicago Press, vol. 8(4), pages 432-480.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frank R. Lichtenberg, 2022. "The effects of dynamic and static competition on prescription drug prices in Denmark, 1997–2017," Journal of Evolutionary Economics, Springer, vol. 32(4), pages 1155-1173, September.
    2. Farasat A. S. Bokhari & Gary M. Fournier, 2013. "Entry in the ADHD drugs market: Welfare impact of generics and me-too's," Journal of Industrial Economics, Wiley Blackwell, vol. 61(2), pages 339-392, June.
    3. Hostenkamp, Gisela, 2013. "Do follow-on therapeutic substitutes induce price competition between hospital medicines? Evidence from the Danish hospital sector," Health Policy, Elsevier, vol. 111(1), pages 68-77.
    4. Joan Costa-i-Font & Alistair McGuire & Nebibe Varol, 2011. "Does Pharmaceutical Price Regulation Affect the Adoption of Generic Competition? Evidence from the OECD, 1999-2008," CESifo Working Paper Series 3441, CESifo.
    5. Sotiris Vandoros, 2014. "Therapeutic Substitution Post‐Patent Expiry: The Cases Of Ace Inhibitors And Proton Pump Inhibitors," Health Economics, John Wiley & Sons, Ltd., vol. 23(5), pages 621-630, May.
    6. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2016. "Reference pricing with endogenous generic entry," Journal of Health Economics, Elsevier, vol. 50(C), pages 312-329.
    7. Hokkanen, Joni & Kangasharju, Aki & Linnosmaa, Ismo & Valtonen, Hannu, 2012. "Generic substitution policy, prices and market structure: evidence from a quasi-experiment in Finland," Working Papers 35, VATT Institute for Economic Research.
    8. Arcidiacono, Peter & Ellickson, Paul B. & Landry, Peter & Ridley, David B., 2013. "Pharmaceutical followers," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 538-553.
    9. Herr, A. & Suppliet, M., 2011. "Co-Payment Exemptions and Reference Prices: an Empirical Study of Pharmaceutical Prices in Germany," Health, Econometrics and Data Group (HEDG) Working Papers 11/18, HEDG, c/o Department of Economics, University of York.
    10. Kanavos, Panos, 2014. "Measuring performance in off-patent drug markets: A methodological framework and empirical evidence from twelve EU Member States," Health Policy, Elsevier, vol. 118(2), pages 229-241.
    11. Luke M. Olson & Brett W. Wendling, 2018. "Estimating the Causal Effect of Entry on Generic Drug Prices Using Hatch–Waxman Exclusivity," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 53(1), pages 139-172, August.
    12. Puig-Junoy, Jaume & López-Valcárcel, Beatriz González, 2014. "Launch prices for new pharmaceuticals in the heavily regulated and subsidized Spanish market, 1995–2007," Health Policy, Elsevier, vol. 116(2), pages 170-181.
    13. Costa-Font, Joan & McGuire, Alistair & Varol, Nebibe, 2014. "Price regulation and relative delays in generic drug adoption," Journal of Health Economics, Elsevier, vol. 38(C), pages 1-9.
    14. Bergman , Mats A. & Granlund, David & Rudholm, Niklas, 2016. "Squeezing the last drop out of your suppliers: an empirical study of market-based purchasing policies for generic pharmaceuticals," Umeå Economic Studies 921, Umeå University, Department of Economics.
    15. Roger Feldman & Félix Lobo, 2013. "Competition in prescription drug markets: the roles of trademarks, advertising, and generic names," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 14(4), pages 667-675, August.
    16. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484, National Bureau of Economic Research, Inc.
    17. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas & Ullrich, Hannes, 2014. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," Journal of Health Economics, Elsevier, vol. 36(C), pages 174-187.
    18. Antonio Cabrales & Sergi Jiménez‐Martín, 2013. "The Determinants Of Pricing In Pharmaceuticals: Are Us Prices Really So High?," Health Economics, John Wiley & Sons, Ltd., vol. 22(11), pages 1377-1397, November.
    19. Duflos, Gautier & Lichtenberg, Frank R., 2012. "Does competition stimulate drug utilization? The impact of changes in market structure on US drug prices, marketing and utilization," International Review of Law and Economics, Elsevier, vol. 32(1), pages 95-109.
    20. Mats A. Bergman & David Granlund & Niklas Rudholm, 2017. "Squeezing the Last Drop Out of Your Suppliers: An Empirical Study of Market-Based Purchasing Policies for Generic Pharmaceuticals," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 969-996, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:hlthec:v:30:y:2021:i:8:p:1910-1932. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www3.interscience.wiley.com/cgi-bin/jhome/5749 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.