Brand-Name and Generic Drug Pricing in a Regulated Environment: Findings from Canada

The“generic competition paradox” refers to the phenomenon that off-patent brand-name drug manufacturers appear to be able to insulate themselves from generic drug competition in maintaining their market shares and profitability. While the existing theoretical work provides some plausible explanations for this paradox based on so-called product differentiation, we note that this literature does not pay full attention to changes in a regulated environment. Canada provides the context for studying drug manufacturers’ price-setting and product differentiation decisions in a regulated market. In this paper, we attempt to fill the void in the literature by incorporating changes in patient preference and government reimbursement policies into our theoretical analysis. We conduct empirical analysis of the relationship between the drug price dynamics and the complex institutions and changing market places of the pharmaceutical industry. The theoretical and empirical work show that the difference in perceived quality between brand-name and generic drugs, rate of copay, and generic-substitution policy can influence brand-name drug price premiums.