Explaining vertical integration in the generic pharmaceutical industry

Kensuke Kubo ()
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Kensuke Kubo: Indian Statistical Institute, New Delhi

Discussion Papers from Indian Statistical Institute, Delhi

Abstract: This paper explores the motives for vertical integration in the US generic pharmaceutical industry. There is some evidence of strategic complementarity: a firm is more likely to enter a generic drug market in a vertically integrated manner if it expects a higher degree of vertical integration among rivals. This suggests that vertical integration is characterized by bandwagon behavior. While bandwagon effects have been widely discussed in the vertical integration literature, this is one of the first studies to present empirical evidence on its existence. The analysis also indicates that vertical integration is driven by the need to promote a particular form of relation-specific investment - the early development of the intermediate good by upstream units to support patent challenges by downstream units. This explains why the increased prevalence of patent challenges - called "paragraph IV certifications" - has coincided with an increase in vertically integrated entry.

Keywords: Vertical integration; bandwagon effect; entry; generic pharmaceuticals; patent litigation (search for similar items in EconPapers)
JEL-codes: L10 L13 L22 L65 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2011-02
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Citations: View citations in EconPapers (1)

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