US Federal Trade Commission Bureau of Economics Working Paper No. 301
40 Pages Posted: 8 Jun 2010 Last revised: 11 Oct 2012
Date Written: October 2, 2012
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: 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