Markups and Fixed Costs in Generic and Off-Patent Pharmaceutical Markets

Abstract

Abstract Wide dispersion is seen in pharmaceutical prices across countries with comparable quality standards. Under monopoly, off-patent and generic drug prices are at least four times higher in the United States than in comparable English-speaking high-income countries. With five or more competitors, off-patent drug prices are similar or lower. Our analysis shows that differential U.S. markups are largely driven by the market power of drug suppliers and are not due to wholesale intermediaries or pharmacies. Furthermore, we show that the traditional mechanism of reducing market power—free entry—is limited because implied entry costs are substantially higher in the United States.