Generic Drug Industry Dynamics

TLDR

The generic drug industry, with its unique institutional and regulatory features, serves as a laboratory for studying competition dynamics. The study estimates a system of structural relationships in the generic drug industry, linking price to competitor number and drug characteristics to entry. The authors estimate structural equations connecting price, competition, and drug characteristics, and use the resulting estimates to simulate the impact of exogenous changes. The analysis shows that generic drug prices decline as competitors increase but stay above marginal cost until at least eight firms, and that expected market size strongly shapes the trajectories of revenues, rents, and firm numbers.

Abstract

Because of its unique institutional and regulatory features, the generic drug industry provides a useful laboratory for understanding how competition evolves. 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 dynamics. We find that generic drug prices fall with increasing 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 expected market size. Finally, we show how estimates derived from a system of structural equations can be used to simulate the effect of changes in an exogenous variable.