Abstract

http://ssrn.com/abstract=1879049
 
 

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Regulation and Welfare: Evidence from Paragraph Iv Generic Entry in the Pharmaceutical Industry


Lee Branstetter


Carnegie Mellon University - H. John Heinz III School of Public Policy and Management; National Bureau of Economic Research (NBER)

Chirantan Chatterjee


Indian Institute of Management (IIMB), Bangalore

Matthew John Higgins


Scheller College of Business, Georgia Institute of Technology; National Bureau of Economic Research (NBER)

June 2011

NBER Working Paper No. w17188

Abstract:     
With increasing frequency, generic drug manufacturers in the United States are able to challenge the monopoly status of patent-protected drugs even before their patents expire. The legal foundation for these challenges is found in Paragraph IV of the Hatch-Waxman Act. If successful, these Paragraph IV challenges generally lead to large market share losses for incumbents and sharp declines in average market prices. This paper estimates, for the first time, the welfare effects of accelerated generic entry via these challenges. Using aggregate brand level sales data between 1997 and 2008 for hypertension drugs in the U.S. we estimate demand using a nested logit model in order to back out cumulated consumer surplus, which we find to be approximately $270 billion. We then undertake a counterfactual analysis, removing the stream of Paragraph IV facilitated generic products, finding a corresponding cumulated consumer surplus of $177 billion. This implies that gains flowing to consumers as a result of this regulatory mechanism amount to around $92 billion or about $133 per consumer in this market. These gains come at the expense to producers who lose, approximately, $14 billion. This suggests that net short-term social gains stands at around $78 billion. We also demonstrate significant cross-molecular substitution within the market and discuss the possible appropriation of consumer rents by the insurance industry. Policy and innovation implications are also discussed.

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Number of Pages in PDF File: 41

working papers series


Date posted: July 5, 2011  

Suggested Citation

Branstetter, Lee and Chatterjee, Chirantan and Higgins, Matthew John, Regulation and Welfare: Evidence from Paragraph Iv Generic Entry in the Pharmaceutical Industry (June 2011). NBER Working Paper No. w17188. Available at SSRN: http://ssrn.com/abstract=1879049

Contact Information

Lee Branstetter (Contact Author)
Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )
Pittsburgh, PA 15213-3890
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Chirantan Chatterjee
Indian Institute of Management (IIMB), Bangalore ( email )
Bannerghatta Road
Bangalore, Karnataka 560076
India
08026993141 (Phone)
HOME PAGE: http://www.iimb.ernet.in/user/185/chirantan-chatterjee

Matthew John Higgins
Scheller College of Business, Georgia Institute of Technology ( email )
800 West Peachtree Street
Atlanta, GA 30308
United States
404-894-4368 (Phone)
404-894-6030 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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