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Does Entry Remedy Collusion? Evidence from the Generic Prescription Drug Cartel

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  • Amanda Starc
  • Thomas G. Wollmann

Abstract

Entry represents a fundamental threat to cartels. We study the extent and effect of this behavior in the largest price-fixing case in US history, which involves generic drug manufacturing. We link information on the cartel's internal operations to regulatory filings and market data. There is a substantial increase in entry after cartel formation, but regulatory approvals delay most entrants by two to four years. We estimate a structural model and simulate counterfactual equilibria. Absent entry, cartel profits would be dramatically higher. Correspondingly, reducing regulatory delays by just 1–2 years equates to consumer compensating variation of $612 million–$1.5 billion.

Suggested Citation

  • Amanda Starc & Thomas G. Wollmann, 2025. "Does Entry Remedy Collusion? Evidence from the Generic Prescription Drug Cartel," American Economic Review, American Economic Association, vol. 115(5), pages 1400-1438, May.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:5:p:1400-1438
    DOI: 10.1257/aer.20220276
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    References listed on IDEAS

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    1. Powell, James L, 1986. "Symmetrically Trimmed Least Squares Estimation for Tobit Models," Econometrica, Econometric Society, vol. 54(6), pages 1435-1460, November.
    2. Clark, Robert & Fabiilli, Christopher & Lasio, Laura, 2022. "Collusion in the US generic drug industry," International Journal of Industrial Organization, Elsevier, vol. 85(C).
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    6. Elie Tamer, 2003. "Incomplete Simultaneous Discrete Response Model with Multiple Equilibria," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(1), pages 147-165.
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    More about this item

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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