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Brand Loyalty and Generic Competition

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  • WAN, Jiangyun(Yunyun)

Abstract

Facing generic competition, a brand-name drug company sometimes launches its own generic called an "authorized generic" (AG) through a third-party entity. If an authorized party transfers a substantial part of its profits to the brand-name drug company, the latter's total profit increases as a result and every branded drug that comes off the patent should have its AG version. However, in actual fact only a small proportion of branded drugs have AGs. To explain this puzzle, I develop a model that features switching costs due to the customer base a brand-name drug develops prior to generic entry. The model predicts that AGs are launched when switching costs to the generics are sufficiently low. I test this hypothess using prescription drug data and find strong support for it.

Suggested Citation

  • WAN, Jiangyun(Yunyun), 2016. "Brand Loyalty and Generic Competition," IIR Working Paper 16-01, Institute of Innovation Research, Hitotsubashi University.
  • Handle: RePEc:hit:iirwps:16-01
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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/27728/1/070iirWP16-01.pdf
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    References listed on IDEAS

    as
    1. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
    2. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
    3. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    4. Baye, Michael R & Crocker, Keith J & Ju, Jiandong, 1996. "Divisionalization, Franchising, and Divestiture Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 86(1), pages 223-236, March.
    5. Appelt, Silvia, 2010. "Authorized Generic Entry prior to Patent Expiry: Reassessing Incentives for Independent Generic Entry," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 357, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    6. Appelt, Silvia, 2010. "Authorized Generic Entry prior to Patent Expiry: Reassessing Incentives for Independent Generic Entry," Discussion Papers in Economics 11476, University of Munich, Department of Economics.
    7. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    brand loyalty; authorized generics; generic entry; customer base; switching cost;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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