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The Economics of Generic Drug Shortages: The Limits of Competition

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  • Rena M. Conti
  • Marta E. Wosińska

Abstract

We examine the economics of the US generic prescription drug market, which comprises the majority of medicines sold. The market is celebrated for its benefits in the form of high quality and low prices for consumers but is also increasingly challenged by shortages that may disrupt patient care. Shortages in the generic drug market present an economic puzzle—in the face of a shortage, prices should rise, encouraging entry, yet we observe shortages increasing in number and persistence. Moreover, if shortages cause patient harm, why don't markets pay a premium for a reliable supply chain? We argue that the puzzle can be explained by the inability of generic drug prices to adjust easily due to regulatory and contracting frictions, and the coexisting presence of asymmetric information and agency problems in the US market. We conclude with a discussion of policy interventions aimed at addressing these challenges to ensure resilient US generic drug supply.

Suggested Citation

  • Rena M. Conti & Marta E. Wosińska, 2025. "The Economics of Generic Drug Shortages: The Limits of Competition," Journal of Economic Perspectives, American Economic Association, vol. 39(2), pages 79-102, Spring.
    • Handle: RePEc:aea:jecper:v:39:y:2025:i:2:p:79-102
    DOI: 10.1257/jep.20241420
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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