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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
    as

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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/27728/070iirWP16-01.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    brand loyalty; authorized generics; generic entry; customer base; switching cost;
    All these keywords.

    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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