Pricing, Patent Loss and the Market for Pharmaceuticals

36 Pages Posted: 25 Jun 2004

See all articles by Richard G. Frank

Richard G. Frank

Harvard Medical School; National Bureau of Economic Research (NBER)

David S. Salkever

UMBC, Department of Public Policy

Date Written: August 1991

Abstract

Empirical studies suggest that entry of generic competitors results in minimal decreases or even increases in brand-name drug prices as well as sharp declines in brand-name advertising. This paper examines circumstances under which this empirical pattern could be observed. The analysis focuses on models where the demand for brand-name pharmaceuticals is divided into two segments, only one of which is cross-price-sensitive. Brand-name firms are assumed to set price and advertising in a Stackelberg context; they allow for responses by generic producers but the latter take decisions by brand-name f inns as given. Brand-name price and advertising responses to entry are shown to depend upon the properties of the reduced-form brand-name demand function. Conditions for positive price responses and negative advertising responses are derived. We also examine the implications for brand-name price levels, and for the brand-name price response to entry, of health sector trends (such as increasing HMO enrollments) that may have the effect of expanding the size of the cross-price-sensitive segment of the market. The paper concludes with a review of recent empirical research and suggestions for future work on the effects of generic entry.

Suggested Citation

Frank, Richard G. and Salkever, David S., Pricing, Patent Loss and the Market for Pharmaceuticals (August 1991). NBER Working Paper No. w3803. Available at SSRN: https://ssrn.com/abstract=236568

Richard G. Frank (Contact Author)

Harvard Medical School ( email )

Department of Health Care Policy
Boston, MA 02115
United States
617-432-0178 (Phone)
617-432-1219 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David S. Salkever

UMBC, Department of Public Policy ( email )

1000 Hilltop Circle
Baltimore, MD 21250

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