Abstract
After patent expirations in pharmaceutical markets, brand-name laboratories are threatened by generic firms’ entry. To fill the gap in the theoretical literature on this topic, we study brand-name firms’ incentives either to deter entry, or to merge with the entrant. These strategies are considered along with the possibility of the brand-name firm producing its own generic drug, called a pseudo-generic drug. Using a vertical differentiation model with Bertrand–Stackelberg competition, we show that each strategy, merging and deterring entry, may be Nash equilibrium, according to the generic firm's setup cost level and to the rate of discount.
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