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Entry Decisions in the Generic Pharmaceutical Industry


  • Fiona M. Scott Morton


In this paper I use data on all generic drug approvals granted from 1984- 1994 to examine whether heterogeneity among potential generic entrants can be used to predict which firms will choose to enter a particular market. The findings suggest that a firm's portfolio characteristics, namely, its previous experience with a drug or therapy reduces the cost of preparing an ANDA and increases the probability of entry. A subsidiary's parent's experience is not generally significant in predicting entry of the subsidiary. Firms also prefer entering markets that are similar, in terms of revenue and sales to hospitals, to markets already in their portfolios. On both scientific and marketing dimensions evidence shows that firms are specializing. I explore several different ways of constructing the set of potential entrants and find the results are not affected by methodological variation. Standard IO theory suggests that profits per entrant will decline in the number of entrants. Previous research has found that generic prices depend on the number of generic entrants, and the results presented here show that the total number of entrants increases with the size of the market (revenue). These findings imply that generic firms face a negative competition externality which makes their expectations about who else might be planning to enter any given market important in the entry decision. The limited evidence on entrant beliefs supports this conjecture as do several features of a regulatory upheaval when firms began entering different markets than they had in the past.

Suggested Citation

  • Fiona M. Scott Morton, 1997. "Entry Decisions in the Generic Pharmaceutical Industry," NBER Working Papers 6190, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6190
    Note: IO

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    References listed on IDEAS

    1. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 75-90, March.
    2. Harrington, Joseph Jr., 1989. "Collusion and predation under (almost) free entry," International Journal of Industrial Organization, Elsevier, vol. 7(3), pages 381-401.
    3. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    4. Timothy F. Bresnahan & Peter C. Reiss, 1990. "Entry in Monopoly Market," Review of Economic Studies, Oxford University Press, vol. 57(4), pages 531-553.
    5. Kirman, William I. & Masson, Robert T., 1986. "Capacity signals and entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 4(1), pages 25-42, March.
    6. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-826, August.
    7. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    8. Timothy F. Bresnahan & Peter C. Reiss, 1987. "Do Entry Conditions Vary across Markets?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3, Specia), pages 833-882.
    9. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring.
    10. Bresnahan, Timothy F. & Reiss, Peter C., 1991. "Empirical models of discrete games," Journal of Econometrics, Elsevier, vol. 48(1-2), pages 57-81.
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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. Andrew Ching, 2000. "Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration," Econometric Society World Congress 2000 Contributed Papers 1242, Econometric Society.
    3. Gianni Amisano & Maria Letizia Giorgetti, 2005. "Entry in Pharmaceutical submarkets: A Bayesian Panel Probit Approach," Working Papers ubs0511, University of Brescia, Department of Economics.
    4. 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.
    5. Erik Canton & Ed Westerhout, 1999. "A model for the Dutch pharmaceutical market," Health Economics, John Wiley & Sons, Ltd., vol. 8(5), pages 391-402.

    More about this item

    JEL classification:

    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm


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