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Pricing, Patent Loss and the Market For Pharmaceuticals

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  • Richard G. Frank
  • David S. Salkever
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    Abstract

    Empirical studies suggest that entry of generic competitors results in minimal decreases or even increases in brand-name drug prices as well as sharp declines in brand-name advertising. This paper examines circumstances under which this empirical pattern could be observed. The analysis focuses on models where the demand for brand-name pharmaceuticals is divided into two segments, only one of which is cross-price-sensitive. Brand-name firms are assumed to set price and advertising in a Stackelberg context; they allow for responses by generic producers but the latter take decisions by brand-name f inns as given. Brand-name price and advertising responses to entry are shown to depend upon the properties of the reduced-form brand-name demand function. Conditions for positive price responses and negative advertising responses are derived. We also examine the implications for brand-name price levels, and for the brand-name price response to entry, of health sector trends (such as increasing HMO enrollments) that may have the effect of expanding the size of the cross-price-sensitive segment of the market. The paper concludes with a review of recent empirical research and suggestions for future work on the effects of generic entry.

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    File URL: http://www.nber.org/papers/w3803.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3803.

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    Date of creation: Aug 1991
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    Publication status: published as Southern Economic Journal, Vol. 59, No. 2, pp. 165-179 (October 1992).
    Handle: RePEc:nbr:nberwo:3803

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    1. Dranove, David, 1989. "Medicaid Drug Formulary Restrictions," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 32(1), pages 143-62, April.
    2. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, Econometric Society, vol. 48(6), pages 1575-79, September.
    3. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, Econometric Society, vol. 50(2), pages 443-59, March.
    4. Schmalensee, Richard., 1980. "Product differentiation advantages of pioneering brands," Working papers 1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    5. Ernst R. Berndt & Zvi Griliches & Joshua G. Rosett, 1990. "On the Accuracy of Producer Price Indexes for Pharmaceutical Preparations: An Audit Based on Detailed Firm-Specific Data," NBER Working Papers 3490, National Bureau of Economic Research, Inc.
    6. Meir Statman, 1981. "The effect of patent expiration on the market position of drugs," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 2(2), pages 61-66, 06.
    7. Leffler, Keith B, 1981. "Persuasion or Information? The Economics of Prescription Drug Advertising," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 24(1), pages 45-74, April.
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    Cited by:
    1. Costa-Font, Joan & Rudisill, Caroline & Tan, Stefanie, 2014. "Brand loyalty, patients and limited generic medicines uptake," Health Policy, Elsevier, Elsevier, vol. 116(2), pages 224-233.

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