Entry Threats and Pricing in the Generic Drug Industry

US Federal Trade Commission Bureau of Economics Working Paper No. 301

40 Pages Posted: 8 Jun 2010 Last revised: 11 Oct 2012

Steven Tenn

Charles River Associates

Brett W. Wendling

Government of the United States of America - Federal Trade Commission

Date Written: October 2, 2012

Abstract

We use the unique regulatory environment of the pharmaceutical industry to examine how potential competition affects generic drug pricing. Our identification strategy exploits a provision of the Hatch-Waxman Act that awards 180 days of marketing exclusivity to the first valid generic drug applicant against the holder of a branded drug patent. This provision creates observable drug-level variation in both actual and potential competition that allows us to identify their separate effects. We find mixed evidence of price being used as a strategic entry deterrent. In smaller drug markets, where entry is more easily deterred, we find that price falls in response to an increase in potential competition. We also find that few manufacturers enter these markets after the Hatch-Waxman exclusivity period, indicating this price reduction is an effective deterrent. In contrast, we find that generic incumbents accommodate entry in larger drug markets by lowering price only after competing generics enter the market.

Keywords: Potential Competition, Entry Deterrence, Pharmaceutical, Pricing

JEL Classification: L11, L13, L65

Suggested Citation

Tenn, Steven and Wendling, Brett W., Entry Threats and Pricing in the Generic Drug Industry (October 2, 2012). US Federal Trade Commission Bureau of Economics Working Paper No. 301. Available at SSRN: https://ssrn.com/abstract=1622220 or http://dx.doi.org/10.2139/ssrn.1622220

Steven Tenn

Charles River Associates ( email )

1201 F Street, NW, Suite 700
Washington, DC 20004-1229
United States
202-662-3806 (Phone)
202-662-3910 (Fax)

Brett W. Wendling (Contact Author)

Government of the United States of America - Federal Trade Commission ( email )

600 Pennsylvania Ave., NW
Washington, DC 20580
United States

Paper statistics

Downloads
228
Rank
109,140
Abstract Views
1,219