The Unexpected Consequences of Generic Entry

Micael Castanheira, Carmine Ornaghi and Georges Siotis

No 2019-21, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

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.

Keywords: Non-Price competition; Pharmaceutical industry; Generic entry; Consumer choice (search for similar items in EconPapers)
Pages: 55 p.
Date: 2019-10
New Economics Papers: this item is included in nep-com, nep-ind and nep-ipr
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Journal Article: The unexpected consequences of generic entry (2019)
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