A Dynamic Oligopoly Structural Model for the Prescription Drug Market after Patent Expiration
International Economic Review, Vol. 51, No. 4, pp. 1175-1207, November 2010
57 Pages Posted: 16 Jun 2008 Last revised: 30 Jan 2011
Date Written: February 2, 2009
Abstract
Motivated by the slow diffusion of generic drugs and the increase in prices of brand-name drugs after generic entry, I incorporate consumer learning and consumer heterogeneity into an empirical dynamic oligopoly model. In the model, firms choose prices to maximize their expected total discounted profits. Moreover, generic firms make their entry decisions before patent expiration. The entry time of generics depends on the FDA random approval process. I apply this model to the market of clonidine. The parameters of the model are estimated and calibrated. The model replicates the stylized facts fairly well. I confirm that consumer heterogeneity in price sensitivity plays an important role in explaining the brand-name pricing pattern. I also apply the model to examine the impact of a policy experiment, which shortens the expected approval time for generics. Although this experiment brings generics to the market sooner, it also reduces the number of generic entrants as the likelihood of entering a crowded market in the early periods increases. Given the change in magnitude of the policy parameter, the experiment improves the rate of learning, and lowers the equilibrium generic prices throughout the period. However, it hardly raises the overall welfare.
Keywords: Dynamic Oligopoly, Prescription Drugs, Brand-name Drugs, Generic Drugs, Patent Expiration, Consumer Learning, Consumer Heterogeneity
JEL Classification: C73, D43, D83, L13, L65
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Heterogeneous Learning and the Targeting of Marketing Communication for New Products
-
A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality
By Tulin Erdem, Michael P. Keane, ...
-
By Bharat N. Anand and Ron Shachar
-
The Risk Reduction Role of Advertising
By Dmitri Byzalov and Ron Shachar
-
The Effects of Detailing on Prescribing Decisions Under Quality Uncertainty
By Andrew T. Ching and Masakazu Ishihara
-
Measuring the Informative and Persuasive Roles of Detailing on Prescribing Decisions
By Andrew T. Ching and Masakazu Ishihara
-
The Impact of Advertising on Consumer Price Sensitivity in Experience Goods Markets
By Tulin Erdem, Michael P. Keane, ...
-
Market Experimentation in a Dynamic Differentiated-Goods Duopoly
By Godfrey Keller and Sven Rady