Dynamic Competition in Pharmaceuticals. Patent Expiry, Generic Penetration, and Industry Structure

Laura Magazzini

University of Verona

Fabio Pammolli

CERM Foundation; IMT Lucca Institute for Advanced Studies

Massimo Riccaboni

University of Florence

European Journal of Health Economics, Vol. 5, No. 2, pp. 175-182, 2004

This paper investigates patterns of industrial dynamics and competition in the pharmaceutical industry, with particular reference to the consequences of patent expiry in different countries. We focus on the competition at the level of single chemical entities, distinguishing between original brands and generic products. Quarterly data, spanning from July 1987 to December 1998, on sales of pharmaceutical products in four countries (USA, UK,Germany, and France) constitute the basis of our analysis. All the products containing major molecules whose patent expiration date lies between 1986 and 1996 are included in our sample.We show how diffusion of generics is linked to the characteristics of the market and investigate how price dynamics of original products are affected by generic competition. Our empirical investigation shows that the dynamics of drug prices and the competition by generic drugs vary significantly across countries. This heterogeneity notwithstanding, a clear distinction seems to emerge.On the one hand, systems that rely on market-based competition in pharmaceuticals promote a clear distinction between firms that act as innovators and firms that act as imitators after patent expiry. Here, original products enjoy premium prices and exclusivity profits under patent protection,and face fierce price competition after patent expiry. On the other hand, in systems that rely on administered prices, penetration by generic drugs tends to be rather limited. Its descriptive and preliminary nature notwithstanding, our analysis seems to have relevant implications at different levels of generality, especially for Europe.

Keywords: Pharmaceuticals, Patent expiration

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Date posted: November 21, 2007 ; Last revised: July 30, 2012

Suggested Citation

Magazzini, Laura and Pammolli, Fabio and Riccaboni, Massimo, Dynamic Competition in Pharmaceuticals. Patent Expiry, Generic Penetration, and Industry Structure. Available at SSRN: http://ssrn.com/abstract=1031406

Contact Information

Laura Magazzini
University of Verona ( email )
Via dell'Artigliere, 8
Verona, 37129
Fabio Pammolli (Contact Author)
CERM Foundation ( email )
Via Fiorentina, 1
Siena, Siena 53100
HOME PAGE: http://www.cermlab.it
IMT Lucca Institute for Advanced Studies ( email )
Piazza San Francesco, 19
Lucca, Lucca 55100
+39 0583 4326551 (Phone)
+39 0583 4326565 (Fax)
HOME PAGE: http://www.imtlucca.it
Massimo Riccaboni
University of Florence ( email )
Piazza di San Marco, 4
Florence, 50121
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