The Unexpected Consequences of Asymmetric Competition. An Application to Big Pharma

56 Pages Posted: 30 Jan 2017  

Micael Castanheira

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR)

Maria Angeles de Frutos

Universidad Carlos III de Madrid - Department of Economics

Carmine Ornaghi

University of Southampton - Division of Economics

Georges Siotis

Universidad Carlos III de Madrid - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: January 2017

Abstract

This paper shows that a pro-competitive shock leading to a steep price drop in one market segment may benefit substitute products. Consumers move away from the cheaper product and demand for the substitutes increases, possibly leading to a drop in consumer surplus. The channel leading to this outcome is non-price competition: the competitive shock on the first set of products decreases the firms' ability to invest in promotion, which cripples their ability to lure consumers. To assess the empirical relevance of these findings, we study the effects of generic entry into the pharmaceutical industry by exploiting a large product-level dataset for the US covering the period 1994Q1 to 2003Q4. We find strong empirical support for the model's theoretical predictions. Our estimates rationalize a surprising finding, namely that a molecule that loses patent protection (the originator drug plus its generic competitors) typically experiences a drop in the quantity market share-despite being sold at a fraction of the original price.

Keywords: Asymmetric competition, Generic entry, Pharmaceutical industry

JEL Classification: D22, I11, L13

Suggested Citation

Castanheira, Micael and de Frutos, Maria Angeles and Ornaghi, Carmine and Siotis, Georges, The Unexpected Consequences of Asymmetric Competition. An Application to Big Pharma (January 2017). CEPR Discussion Paper No. DP11813. Available at SSRN: https://ssrn.com/abstract=2908226

Micael Castanheira (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 4467 (Phone)
+32 2 650 3369 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Maria Angeles De Frutos

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Carmine Ornaghi

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom

Georges Siotis

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34 91 624 9312 (Phone)
+34 91 624 9875 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Paper statistics

Downloads
1
Abstract Views
143