Common Ownership and Market Entry: Evidence from the Pharmaceutical Industry

ECONOMISTS have vigorously debated whether advertising and other messages supplied by sellers to buyers represent the efficient provision of information or the exploitation of buyers' imperfect access to it. Many economists now agree that each view commands some truth. Advertising should convey information efficiently where the buyer can easily verify it. But it may engender inefficient rent-seeking outlays by producers able to hamper buyers' gaining of information from alternative sources. For example, if buyers sample product information randomly, an incumbent can "jam" the channels through which entrants transmit their messages by loading the sampled population with messages of his own. Or the incumbent's messages can reinforce buyers' habits so as to reduce their prior expectations of the value of trying an alternative brand.2 If sales promotion is effective (by whatever means) in causing buyers to shift among competing products, it becomes a form of rent-seeking outlay by which sellers bid for the available customers.3 The problem for empirical research is to determine the extent to which seller-supplied information pursues a rent-seeking goal and thus incurs social costs. Those costs must be set against the efficiency advantage of sellers (relative to buyers or

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 research suggests 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.

This study assessed the impact of generic drug market competition on prices, accessibility, and savings. It analyzed delays in generic drug market entry and the effect of competition on the price trends of outpatient pharmacy drugs facing generic competition from 2013 to 2018. Data were extracted from the FDA website, including a list of new generic drugs, and from the Centers for Medicare and Medicaid Services, including National Average Drug Acquisition Cost (NADAC) and Average Manufacturer Price (AMP). Descriptive and time-series analyses were conducted. On average, generic drugs entered the market 8.4 months after FDA approval and 16.6 years after the initial FDA approval of the brand-name drugs. The median NADAC price of generic drugs was 65.7% of the brand-name drugs’ price at market entry and decreased to 26.0% after three years. The median brand-name drug NADAC price increased by 1.0% per month before generic entry, remained stable during the generic entry period, and increased by 0.4% per month afterwards. Generic competition not only lowered drug prices but also influenced brand-name drug price trends both before and after generic entry. The price reductions from generic competition exceeded previous estimates that only compared prices at the time of generic market entry.

The aim of this paper is to analyse empirically entry decisions by generic firms into markets with tough regulation. Generic drugs might be a key driver of competition and cost containment in pharmaceutical markets. The dynamics of reforms of patents and pricing across drug markets in Spain are useful to identify the impact of regulations on generic entry. Estimates from a count data model using a panel of 86 active ingredients during the 1999?2005 period show that the drivers of generic entry in markets with price regulations are similar to less regulated markets: generic firms entries are positively affected by the market size and time trend, and negatively affected by the number of incumbent laboratories and the number of substitutes active ingredients. We also find that contrary to what policy makers expected, the system of reference pricing restrains considerably the generic entry. Short run brand name drug price reductions are obtained by governments at the cost of long run benefits from fostering generic entry and post-patent competition into the markets.

We investigate the relation between common institutional ownership of the firms in an industry and product market competition. We find that common ownership is neither robustly positively related with industry profitability or output prices nor robustly negatively related with measures of non-price competition, as would be expected if common ownership reduces competition. This conclusion holds regardless of industry classification choice, common ownership measure, profitability measure, non-price competition proxy, or model specification. Our point estimates are close to zero with tight bounds, rejecting even modestly-sized economic effects. We conclude that antitrust restrictions seeking to limit intra-industry common ownership are not currently warranted.

The Japanese pharmaceutical market is known for having a relatively low market penetration of generic medicines. However, the velocity of generic penetration varies among medicines. Looking at current sales and share of off-patent branded medicines and generic medicines in Japanese pharmaceutical market, our main aim is to identify the factors associated with sales reductions of off-patent medicines and price competition caused by generic entry in the Japanese pharmaceutical market. We showed as one result that an increase in the number of generic maker entries significantly increases both price competition and sales reductions of off-patent branded medicines. As a second factor of note, we found that being subject to “NHI Drug Price Premium for Promoting the Creation of New Drugs and the Elimination of Off-label Use” before generic entry is related to maintaining sales of off-patent branded medicines after generic entry. The importance of generic medicines is increasing in association with the hypertrophy of health care expenditures in Japan. Efficient polices and corporate strategies reflecting market principles are strongly needed. Detailed results of this study on what determines whether sales and prices of off-patent medicines significantly decrease after generic entry in the Japanese pharmaceutical market should be useful for this purpose.

Common ownership and competition in product markets

Little is known about how the different policies available to promote use of generic medicines affect the price per unit supplied or sold. This study compares the influence of pricing policies for generic medicines on atorvastatin prices in Australia, New Zealand, the Republic of Korea and Singapore, after market entry of generic atorvastatin. The annual price of atorvastatin per defined daily dose supplied (price/DDD) was examined for each country from 2006 to 2015 (≥2 years before and ≥4 years after generic market entry). Prices were converted to international dollars and cumulative percentage price reductions were calculated for the first 4 years following generic entry. Prior to market entry of generic atorvastatin, New Zealand had the lowest price ($0.10/DDD), and the Republic of Korea the highest ($2.89/DDD). The price/DDD fell immediately after generic entry in all countries except New Zealand, which already had low prices. The largest immediate decrease was observed in Singapore (46%, year 1). By the fourth year after generic entry, the price had fallen by 46-80% in all countries; however, large price differences between countries remained. New Zealand's tendering system and use of preferred medicines resulted in very low atorvastatin prices well before patent expiry. Pricing policies in the other three countries were effective in reducing atorvastatin prices, with reductions of between 46% and 80% within 4 years of generic entry. Where tendering and use of preferred medicines were the mechanisms for atorvastatin procurement (New Zealand), prices were lowest before and after generic entry. Mandatory price cuts, combined with price-disclosure policies (Australia), produced similar relative price reductions to tendering systems (New Zealand, Singapore) at 4 years. By comparison, mandatory price cuts upon generic entry as the sole measure, while initially effective, were associated with the smallest relative reduction in price after 4 years (Republic of Korea).

We test if an increase in common ownership changes future expected profits with an event study method. We collect instances of a stock entering the S&P 500 index and identify its product market competitors. We measure the change in institutional and common ownership (with product market rivals) and find that entering stocks experience a significant increase in both. We measure the stock returns of the entrant's product market rivals upon the entry news. We find that increases in common ownership (driven by the whole vector of ownership similarity) cause increases in stock returns, consistent with a hypothesis that common ownership raises profits. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We test if an increase in common ownership changes future expected profits with an event study method. We collect instances of a stock entering the S&P 500 index and identify its product market competitors. We measure the change in institutional and common ownership (with product market rivals) and find that entering stocks experience a significant increase in both. We measure the stock returns of the entrant's product market rivals upon the entry news. We find that increases in common ownership (driven by the whole vector of ownership similarity) cause increases in stock returns, consistent with a hypothesis that common ownership raises profits.

Despite the cost of pharmaceuticals, studies assessing prices of osteoporosis drugs are lacking. This study examined trends in prices of osteoporosis drugs in the United States in the period 1988-2014, assessed pricing structure of osteoporosis drugs, and evaluated price trends before and after generic drugs market entry. Data were derived from the U.S. Food and Drug Administration, the RedBook, the Centers for Medicare & Medicaid Services, and the Federal Supply Schedule (FSS). Descriptive statistics and segmented linear regression analyses were performed. In the period 1988-2014, osteoporosis drug prices increased faster than the inflation. The average wholesale price (AWP) of generic products at market entry represented 90 percent of the AWP for the corresponding brand. Prices of brand products continued to increase after generic entry. Drug prices showed a significant variation when compared with the brand AWP. The brand wholesale acquisition cost (WAC) was typically set at 83.3 percent of the AWP. Community pharmacies acquired osteoporosis brand drugs at a median of 80.5 percent of the brand AWP. Significant reductions in brand AWP were observed for Medicare Part B (78.5 percent of the brand AWP), generic National Average Drug Acquisition Cost (33.7 percent), and FSS (22.5 percent). There are significant differences in the manufacturer prices, pharmacy acquisition costs and reimbursement rates of osteoporosis drugs. Pharmaceutical companies listed prices are higher than the pharmacy actual estimated acquisitions costs, and the prices used for reimbursement to providers. Generic drugs entry significantly drives down prices; still, prices of branded drugs facing generic competition continued to increase after generic market entry.

Generic drug entry into the pharmaceutical market typically leads to a substantial decline in originator sales. Understanding the extent and trajectory of this erosion is essential for effective lifecycle management and strategic planning. This study quantified sales erosion after generic entry for originator drugs approved in the United States between 2010 and 2019 and developed a model to predict year-specific sales retention based on key product- and market-level characteristics. A total of 140 originator drugs were analyzed using FDA approval records and sales data from Evaluate Pharma. Five-year retention patterns were modeled using a three-parameter exponential decay function. Subgroup analyses were conducted by year of generic entry, therapeutic class, and product-specific features. A polynomial regression model using 700 product-year observations incorporated three binary market indicators and linear and quadratic time terms. Sales retention declined from 73.1% in the first year after generic entry to 31.7% by year five. The exponential decay model demonstrated a strong goodness-of-fit (root mean squared error [RMSE] = 0.006), capturing the initial steep decline and subsequent stabilization. Subgroup analyses showed faster erosion for blockbuster drugs and in markets with multiple first-generation generics. The regression model explained 96.4% of annual variation in retention (RMSE = 0.033), accounting for product and market heterogeneity. Sales decline after generic entry follows a predictable yet heterogeneous trajectory shaped by product and market factors. Exponential decay and polynomial regression models together offer a robust framework for forecasting sales retention and guiding strategic decisions in the pharmaceutical industry.

THE theory of the economies of scale is the theory of the relationship between the scale of use of a properly chosen combination of all productive services and the rate of output of the enterprise. In its broadest formulation this theory is a crucial element of the economic theory of social organization, for it underlies every question of market organization and the role (and locus) of governmental control over economic life. Let one ask himself how an economy would be organized if every economic activity were prohibitively inefficient upon alternately a small scale and a large scale, and the answer will convince him that here lies a basic element of the theory of economic organization. The theory has limped along for a century, collecting large pieces of good reasoning and small chunks of empirical evidence but never achieving scientific prosperity. A large cause of its poverty is that the central concept of the theory-the firm of optimum size-has eluded confident measurement. We have been dangerously close to denying Lincoln, for all economists have been ignorant of the optimum size of firm in almost every industry all of the time, and this ignorance has been an insurmountable barrier between us and the understanding of the forces which govern optimum size. It is almost as if one were trying to measure the nutritive values of goods without knowing whether the consumers who ate them continued to live.

An incentive design is an important system to manage the organization in management practice. In the previous management study, several researchers shed light on team performance evaluation under a specific incentive system. In this study, assuming the quantity competition in the product market, we consider the effect of team efforts under a hierarchical team to examine the effect of internal management on a firm's strategy. In particular, we focus on manager‐determined share in the internal team under profit sharing as an incentive system because profit sharing can induce players to enhance their efforts. From our analysis, we find that when the manager in the team is more efficient than the staff, the manager shares a large profit with the staff to incentivize the staff's large effort. Our result not only provides the relationship between internal team production and product market competition but also suggests the incentive design of the team.

Since the patent system relies on private litigation for challenging weak patents, and patent settlements might influence the incentives for challenging patents, the question arises whether the antitrust assessment of patent settlements should also consider their impact on the incentives to challenge potentially invalid patents. Patent settlements in the pharmaceutical industry between originator and generic firms have been scrutinized critically by competition authorities for delaying the market entry of generics and therefore harming consumers. In this paper we present a model that analyzes the tradeoff between limiting the delay of generic entry through patent settlements and giving generic firms more incentives for challenging weak patents of the originator firms. We show that allowing patent settlements with a later market entry of generics than the expected market entry under patent litigation can increase consumer welfare under certain conditions. We introduce a policy parameter for determining the optimal additional period for collusion that would maximize consumer welfare and show that the size of this policy parameter depends on the size of the challenging costs, the intensity of competition, and the duration between the generics’ market entry decisions.