Generic Drug Industry Dynamics

Abstract

Because of its unique institutional and regulatory features, the generic drug industry provides a useful laboratory for understanding how competition evolves within a market. We exploit these features to estimate a system of structural relationships in this industry, including the relationship between price and the number of competitors, and between drug characteristics and the entry process. Our methodology yields a number of findings regarding industry dynamic effects. We find that generic drug prices fall with the number of competitors, but remain above long-run marginal cost until there are eight or more competitors. We also find the size and time paths of generic revenues, rents and the number of firms are greatly affected by measures reflecting the expected market size. An advantage of estimating a system of structural equations is that we can determine how a change in an exogenous variable will affect the equilibrium. We exploit this property to evaluate recent policy changes toward the pharmaceutical industry.