Some Observations in the U.S. Prescription Drug Market after Patent Expiration During the 80s

Abstract

This paper summarizes four stylized facts about the prescription drug markets after patent expiration during the 80s: (i) generic firms entered the market at different points of time after patent expiration and they seldom exited; (ii) the brand-name price remained much higher than generic prices, and many brand-name firms raised their prices after generic entry; (iii) the average price kept decreasing over time even when the number of generic firms became constant; and (iv) it took time for generics to build up significant market shares. I argue that in order to explain these facts, one needs to model generic firms facing some uncertainty about the entry time, consumer being heterogeneous in price sensitivity, and uncertain about the quality of generics, and that it takes time for consumers to learn the true quality of generics.

Keywords: Prescription Drugs, Brand-name Drugs, Generic Drugs, Patent Expiration, Consumer Learning, Consumer Heterogeneity

JEL Classification: D12, D43, L13, L15, L65, M31