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Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration


  • Andrew Ching

    (University of Minnesota)


In this paper I formulate and estimate an empirical dynamic oligopoly model that incorporates consumer learning, consumer heterogeneity and forward-looking firms. I apply this model to explain the evolution of pharmaceutical markets after patent expiration, and to address its related policy issues. I develop a practical method to estimate the parameters of the model that does not require finding instruments or solving the equilibrium model. Using this new method and a data set detailing the evolution of prices and market shares for 31 chemical entities from 1984-1990, I estimate the distribution of consumer preferences that determine how consumers evaluate risks, perceived attribute levels, and prices when choosing among brand-name originals and generics. I also design and program a backward induction algorithm to numerically solve the equilibrium model with different market structures. This computer program, together with the estimated preference parameter values and calibrated cost parameter values, are used to select a market structure that best fits the data, and the selected market structure is applied to analyze the firms' strategic behavior. According to the preliminary estimate results based on data from two markets, flurazepam and temazepam, I find that learning plays an important role in explaining the slow increase in market share for generic drugs. I also demonstrate that consumer heterogeneity has the potential to explain the pricing pattern that brand-name prices increase in response to generic entry. Finally, the model will be used to quantify the benefits of introducing generic drugs and to simulate the impact of various new public policies, including restricting the price for brand-name originals below some arbitrary level, reducing the average approval time for marketing generic drugs, and changing the cost of obtaining such approval.

Suggested Citation

  • Andrew Ching, 2000. "Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration," Econometric Society World Congress 2000 Contributed Papers 1242, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1242

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    References listed on IDEAS

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    Cited by:

    1. Laura Magazzini & Fabio Pammolli & Massimo Riccaboni, 2004. "Dynamic competition in pharmaceuticals," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 5(2), pages 175-182, May.
    2. Laura Magazzini & Fabio Pammolli & Gianluca Papa & Nicola Carmine Salerno, 2005. "Generici vs. Branded: confronto internazionale su prodotti off-patent rimborsati dal SSN," Working Papers CERM 01-2005, Competitività, Regole, Mercati (CERM).
    3. Bergemann, Dirk & Valimaki, Juuso, 2002. "Entry and Vertical Differentiation," Journal of Economic Theory, Elsevier, vol. 106(1), pages 91-125, September.
    4. Andrew T. Ching & Tülin Erdem & Michael P. Keane, 2013. "Learning Models: An Assessment of Progress, Challenges and New Developments," Economics Papers 2013-W07, Economics Group, Nuffield College, University of Oxford.
    5. Magazzini, Laura & Pammolli, Fabio & Riccaboni, Massimo, 2004. "Dynamic Competition in Pharmaceuticals: Patent Expiry, Generic Penetration, and Industry Structure," MPRA Paper 15968, University Library of Munich, Germany.
    6. Ching, Andrew & Ishihara, Masakazu, 2007. "The Effects of Detailing on Prescribing Decisions under Two-Sided Learning," MPRA Paper 4935, University Library of Munich, Germany.
    7. Andrew Ching & Masakazu Ishihara, 2010. "The effects of detailing on prescribing decisions under quality uncertainty," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 123-165, June.
    8. Xinlei Chen & Yuxin Chen & Charles Weinberg, 2013. "Learning about movies: the impact of movie release types on the nationwide box office," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 37(3), pages 359-386, August.
    9. Bhattacharya, Jayanta & Vogt, William B, 2003. "A Simple Model of Pharmaceutical Price Dynamics," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 599-626, October.
    10. Anna Merino, 2000. "The impact of the reference price system on the pharmaceutical market: A theoretical approach," Working Papers, Research Center on Health and Economics 524, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2003.
    11. Gonca P. Soysal & Lakshman Krishnamurthi, 2012. "Demand Dynamics in the Seasonal Goods Industry: An Empirical Analysis," Marketing Science, INFORMS, vol. 31(2), pages 293-316, March.

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