Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act

Abstract

IN 1984, Congress enacted a new law that greatly affected the economics of the pharmaceutical industry in the United States. It has been characterized as the most important legislation affecting competition in the pharmaceutical industry since the 1962 Kefauver-Harris Amendments to the Food and Drug Act. This 1984 law, known as the Drug Price Competition and Patent Term Restoration Act (hereinafter the 1984 Act), facilitated the entry of generic drug products after patent expiration while it also restored part of the patent life lost during the premarket regulatory process for new introductions.1 Market entry by generics was relatively limited prior to 1984 because of costly Food and Drug Administration (FDA) requirements that had to be met by the imitative products. That is, generic drugs often would have to duplicate many of the pioneer's tests to gain market approval after patent expiration. As a result of the 1984 law, generic products need only demonstrate bioequivalence to the pioneer's brand, and generic entry has increased significantly. This has provided a body of very interesting data to analyze the pattern of entry and the pricing strategies followed by the entrants and incumbents. In this article, we make use of data covering the sales and prices of the pioneer and generic products for eighteen drug products, generally over the time period 1984-88. A number of issues are examined. First,