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Explaining vertical integration in the generic pharmaceutical industry

Author

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  • Kensuke Kubo

    (Indian Statistical Institute, New Delhi
    Institute of Economic Growth)

Abstract

This paper explores the motives for vertical integration in the US generic pharmaceutical industry. There is some evidence of strategic complementarity: a firm is more likely to enter a generic drug market in a vertically integrated manner if it expects a higher degree of vertical integration among rivals. This suggests that vertical integration is characterized by bandwagon behavior. While bandwagon effects have been widely discussed in the vertical integration literature, this is one of the first studies to present empirical evidence on its existence. The analysis also indicates that vertical integration is driven by the need to promote a particular form of relation-specific investment - the early development of the intermediate good by upstream units to support patent challenges by downstream units. This explains why the increased prevalence of patent challenges - called "paragraph IV certifications" - has coincided with an increase in vertically integrated entry.

Suggested Citation

  • Kensuke Kubo, 2011. "Explaining vertical integration in the generic pharmaceutical industry," Discussion Papers 11-02, Indian Statistical Institute, Delhi.
    • Handle: RePEc:alo:isipdp:11-02
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    File URL: http://www.isid.ac.in/~pu/dispapers/dp11-02.pdf
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    References listed on IDEAS

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    Cited by:

    1. Andrew F. Newman & Patrick Legros, 2011. "Incomplete Contracts and Industrial Organization: A Survey," Boston University - Department of Economics - Working Papers Series WP2011-036, Boston University - Department of Economics.

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    More about this item

    Keywords

    Vertical integration; bandwagon effect; entry; generic pharmaceuticals; patent litigation;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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