Generic Drug Industry Dynamics

This work estimates 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, and yields a number of findings regarding industry dynamics.

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. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.