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Patent Expiration and Competition: A dynamic limit price model

Author

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  • Anastasios Papanastasiou

Abstract

We develop a dynamic model to explore the optimal pricing strategy of a monopolist that faces potential market entry at a given point in time. By engaging in promotional activities, the dominant firm may increase future demand for the product, while by charging below a limit price it can prevent competition from entering the market. Our analysis suggests that the optimal path for price and advertisement depends on the price elasticity of demand and the duration of monopoly life. Relating our model to the market for pharmaceuticals, we establish conditions that would give rise to a Generics Competition Paradox (GCP) and discuss how these conditions are linked to the existing theories that attempt to explain the GCP.

Suggested Citation

  • Anastasios Papanastasiou, 2014. "Patent Expiration and Competition: A dynamic limit price model," Working Papers 140009, Canadian Centre for Health Economics.
    • Handle: RePEc:cch:wpaper:140009
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    More about this item

    Keywords

    Monopoly; generic competition; brand-name drugs; limit price; price elasticity of demand;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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