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Inferring the Effects of Vertical Integration from Entry Games : An Analysis of the Generic Pharmaceutical Industry

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  • Kubo, Kensuke

Abstract

This paper introduces a novel method for examining the effects of vertical integration. The basic idea is to estimate the parameters of a vertical entry game. By carefully specifying firms' payoff equations and constructing appropriate tests, it is possible to use estimates on rival profit effects to make inferences about the existence of vertical foreclosure. I estimate the vertical entry model using data from the US generic pharmaceutical industry. The estimates indicate that vertical integration is unlikely to generate anticompetitive foreclosure effects. On the other hand, significant efficiency effects are found to arise from vertical integration. I use the parameter estimates to simulate a policy that bans vertically integrated entry. The simulation results suggest that such a ban is counterproductive; it is likely to reduce entry into smaller markets.

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File URL: http://ir.ide.go.jp/dspace/bitstream/2344/870/1/221.pdf
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Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 221.

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Date of creation: Jan 2010
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Publication status: Published in IDE Discussion Paper. No. 221. 2010. 01
Handle: RePEc:jet:dpaper:dpaper221

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Related research

Keywords: United States; Pharmaceutical Industry; Monopolies; Vertical Integration; Vertical Foreclosure; Entry; Generic Pharmaceuticals;

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