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The Unexpected Consequences of Generic Entry

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  • Micael Castanheira De Moura
  • Carmine Ornaghi
  • Georges Siotis

Abstract

Generic drugs are sold at a fraction of the original brand price. Yet, generic entry typically produces a drop in the quantity market share of the molecule losing exclusivity. This effect is economically and statistically significant for a large dataset covering hundreds of prescription drugs sold in the US during the period 1994Q1-2003Q4. This paper proposes the first systematic analysis of what appears to be a market anomaly.We propose a model to characterize the market equilibrium before and after generic entry. We identify precise conditions under which entry reduces the quantity market share of the molecule. Intriguingly, this is more likely to occur when the remaining patent-protected molecules feature low horizontal differentiation. We test this and other theoretical predictions of the model and find they are validated empirically.

Suggested Citation

  • Micael Castanheira De Moura & Carmine Ornaghi & Georges Siotis, 2019. "The Unexpected Consequences of Generic Entry," Working Papers ECARES 2019-21, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/293928
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    Cited by:

    1. Sofia Amaral-Garcia, 2020. "Medical Device Companies and Doctors: Do their Interactions Affect Medical Treatments ?," Working Papers ECARES 2020-18, ULB -- Universite Libre de Bruxelles.
    2. Castanheira, Micael & Ornaghi, Carmine & Siotis, Georges, 2019. "Market definition in the pharmaceutical industry: a case of drugs hopping antitrust markets?," CEPR Discussion Papers 14035, C.E.P.R. Discussion Papers.
    3. Ilaria Natali & Mathias Dewatripont & Victor Ginsburgh & Michel Goldman & Patrick Legros, 2020. "Prescription Opioids and Economic Hardship in France," Working Papers ECARES 2020-01, ULB -- Universite Libre de Bruxelles.

    More about this item

    Keywords

    Non-Price competition; Pharmaceutical industry; Generic entry; Consumer choice;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • 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

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