Potential Competition and Patent Expiration: Empirical Evidence >From the Pharmaceuticals Market

In this paper, we present a formal model of the pharmaceutical market as a market with price competition between the original and the generic alternative. The generic substitutes are perceived by the consumers as di¤erentiated products, even though they are chemically identical. In addition, because of price regulation, a low ”limit price” will be a credible commitment not to increase prices upon entry. Hence entry can be deterred. We show that in such a context, the original manufacturer may have an incentive to deter entry. Finally, some empirical results concerning the determinants of the price paths of the brand name drugs are presented. The results suggest that the introduction of potential competition, i.e. patent expiration, does force brand name manufacturers to lower their prices, as does generic entry and did the introduction of the reference-price system. The opinions expressed in this paper are those of the authors and do not necessarily coincide with those ot the Competition Authoriy.