Pricing, Patent Loss and the Market For Pharmaceuticals

Richard G. Frank and David Salkever ()

No 3803, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Empirical studies suggest that entry of generic competitors results in minimal decreases or even increases in brand-name drug prices as well as sharp declines in brand-name advertising. This paper examines circumstances under which this empirical pattern could be observed. The analysis focuses on models where the demand for brand-name pharmaceuticals is divided into two segments, only one of which is cross-price-sensitive. Brand-name firms are assumed to set price and advertising in a Stackelberg context; they allow for responses by generic producers but the latter take decisions by brand-name f inns as given. Brand-name price and advertising responses to entry are shown to depend upon the properties of the reduced-form brand-name demand function. Conditions for positive price responses and negative advertising responses are derived. We also examine the implications for brand-name price levels, and for the brand-name price response to entry, of health sector trends (such as increasing HMO enrollments) that may have the effect of expanding the size of the cross-price-sensitive segment of the market. The paper concludes with a review of recent empirical research and suggestions for future work on the effects of generic entry.

Date: 1991-08
Note: EH
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Citations: View citations in EconPapers (13)

Published as Southern Economic Journal, Vol. 59, No. 2, pp. 165-179 (October 1992).

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