Brand Loyalty and Generic Competition

Jiangyun(Yunyun) Wan

No 16-01, IIR Working Paper from Institute of Innovation Research, Hitotsubashi University

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.

Keywords: brand loyalty; authorized generics; generic entry; customer base; switching cost (search for similar items in EconPapers)
JEL-codes: I11 L13 L20 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2016-01
New Economics Papers: this item is included in nep-com, nep-ind, nep-ipr, nep-pr~ and nep-mkt
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