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A Dynamic Oligopoly Structural Model for the Prescription Drug Market After Patent Expiration

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  • Andrew Ching

Abstract

Motivated by the slow diffusion of generic drugs and the increase in prices of brand-name drugs after generic entry, I incorporate consumer learning and consumer heterogeneity into an empirical dynamic oligopoly model. In the model, firms choose prices to maximize their expected total discounted profits. Moreover, generic firms make their entry decisions before patent expiration. The entry time of generics depends on the FDA random approval process. I apply this model to the market of clonidine. The demand side parameters are estimated in a previous paper (Ching (2003)). The supply side parameters are estimated and calibrated here. The model replicates the stylized facts fairly well. I confirm that consumer heterogeneity in price sensitivity plays an important role in explaining the brand-name pricing pattern. I also apply the model to examine the impact of a policy experiment, which shortens the expected approval time for generics. Although this experiment brings generics to the market sooner, it also reduces the number of generic entrants as the likelihood of entering a crowded market in the early periods increases. Given the change in the magnitude of the policy parameter, the experiment improves the rate of learning, and lowers the equilibrium generic prices throughout the period. However, it hardly raises the overall welfare

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 735.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:735

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Keywords: Dynamic Oligopoly; Consumer Learning; Pharmaceutical Industry;

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Cited by:
  1. Andrew Ching & Masakazu Ishihara, 2010. "The effects of detailing on prescribing decisions under quality uncertainty," Quantitative Marketing and Economics, Springer, vol. 8(2), pages 123-165, June.
  2. Alpert, Abby & Duggan, Mark & Hellerstein, Judith K., 2013. "Perverse reverse price competition: Average wholesale prices and Medicaid pharmaceutical spending," Journal of Public Economics, Elsevier, vol. 108(C), pages 44-62.
  3. Sebastian Kranz, 2013. "Relational Contracting, Repeated Negotiations, and Hold-Up," Levine's Working Paper Archive 786969000000000676, David K. Levine.
  4. Jean-Pierre Dubé & K. Sudhir & Andrew Ching & Gregory Crawford & Michaela Draganska & Jeremy Fox & Wesley Hartmann & Günter Hitsch & V. Viard & Miguel Villas-Boas & Naufel Vilcassim, 2005. "Recent Advances in Structural Econometric Modeling: Dynamics, Product Positioning and Entry," Marketing Letters, Springer, vol. 16(3), pages 209-224, December.
  5. Sebastian Kranz, 2012. "Discounted Stochastic Games with Voluntary Transfers," Levine's Working Paper Archive 786969000000000423, David K. Levine.
  6. Brekke, Kurt R. & Holmas, Tor Helge & Straume, Odd Rune, 2011. "Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 624-638, August.
  7. Ginger Zhe Jin & Marc Rysman, 2012. "Platform Pricing at Sports Card Conventions," NBER Working Papers 17959, National Bureau of Economic Research, Inc.
  8. 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.
  9. Andrew Ching & Susumu Imai & Masakazu Ishihara & Neelam Jain, 2009. "A Practitioner's Guide to Bayesian Estimation of Discrete Choice Dynamic Programming Models," Working Papers 1201, Queen's University, Department of Economics.
  10. Andrew T. Ching & Tülin Erdem & Michael P. Keane, 2013. "Learning Models: An Assessment of Progress, Challenges and New Developments," Economics Papers 2013-W07, Economics Group, Nuffield College, University of Oxford.
  11. Peter Arcidiacono & Paul B. Ellickson & Peter Landry & David B. Ridley, 2013. "Pharmaceutical Followers," NBER Working Papers 19522, National Bureau of Economic Research, Inc.
  12. 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, vol. 14(4), pages 667-675, August.
  13. Anderson, Simon P. & Ciliberto, Federico & Liaukonyte, Jura, 2013. "Information content of advertising: Empirical evidence from the OTC analgesic industry," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 355-367.
  14. Ching, Andrew & Ishihara, Masakazu, 2007. "The Effects of Detailing on Prescribing Decisions under Two-Sided Learning," MPRA Paper 4935, University Library of Munich, Germany.
  15. Marc Rysman & Ginger Zhe Jin, 2012. "Platform Pricing at Sports Card Conventions," Boston University - Department of Economics - Working Papers Series WP2012-015, Boston University - Department of Economics.

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