Common Ownership and Market Entry: Evidence from Pharmaceutical Industry

55 Pages Posted: 26 Jun 2018 Last revised: 11 Sep 2018

See all articles by Melissa Newham

Melissa Newham

KU Leuven; German Institute for Economic Research (DIW Berlin)

Jo Seldeslachts

KU Leuven - Faculty of Business and Economics (FEB); German Institute for Economic Research (DIW Berlin)

Albert Banal-Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB); City University London - Department of Economics

Date Written: June 1, 2018

Abstract

Common ownership - where two firms are at least partially owned by the same investor - and its impact on product market outcomes has recently drawn a lot of attention from scholars and practitioners alike. Theoretical and empirical researchsuggests that common ownership can lead to higher prices. This paper focuses on implications for market entry. To estimate the effect of common ownership on entry decisions, we focus on the pharmaceutical industry. In particular, we consider the entry decisions of generic pharmaceutical firms into drug markets opened up by the end of regulatory protection in the US. We first provide a theoretical framework that shows that a higher level of common ownership between the brand firm (incumbent) and potential generic entrant reduces the generic's incentives to entry. We provide robust evidence for this prediction. The effect is large: a one-standard-deviation increase in common ownership decreases the probability of generic entry by 9-13%. We extend our basic theoretical framework and allow for multiple entrants. Our model shows that for sufficiently high levels of common ownership, the classical idea of entry decisions being strategic substitutes can be reversed into being strategic complements. Our empirical results provide some support for these predictions.

Keywords: Market entry, ownership structure, pharma

JEL Classification: G23, K21, L11, L41, L65

Suggested Citation

Newham, Melissa and Seldeslachts, Jo and Banal Estañol, Albert, Common Ownership and Market Entry: Evidence from Pharmaceutical Industry (June 1, 2018). DIW Berlin Discussion Paper No. 1738. Available at SSRN: https://ssrn.com/abstract=3194394 or http://dx.doi.org/10.2139/ssrn.3194394

Melissa Newham

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Jo Seldeslachts (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Albert Banal Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

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