Does competition stimulate drug utilization? The impact of changes in market structure on US drug prices, marketing and utilization

Abstract

Microeconomic theory implies that the demand for prescription drugs should be inversely related to drug prices and directly related to marketing expenditure. Changes in market structure due to patent expiration or other factors is likely to reduce both the average price of a drug and marketing expenditure, so the effect of increased competition on total utilization of a drug is theoretically indeterminate. We use longitudinal, molecule-level data on virtually all prescription drugs sold during the period 2000–2004 to analyze the impact of changes in market structure (primarily resulting from patent expiration) on U.S. drug prices, marketing, and utilization. Price and marketing expenditure both decline by about 50–60% in the years immediately following generic entry, but the number of prescriptions remains essentially constant during those years. The two effects of increased competition on utilization – positive (via price), and negative (via marketing) – almost exactly offset one another, so the net effect of patent expiration on drug utilization is zero.