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The unexpected consequences of asymmetric competition. An application to Big Pharma

The unexpected consequences of asymmetric competition. An application to Big Pharma
The unexpected consequences of asymmetric competition. An application to Big Pharma
This paper shows that a pro-competitive shock leading to a steep price drop in one market segment may benefit substitute products. Consumers move away from the cheaper product and demand for the substitutes increases, possibly leading to a drop in consumer surplus. The channel leading to this outcome is non-price competition: the competitive shock on the first set of products decreases the firms' ability to invest in promotion, which cripples their ability to lure consumers. To assess the empirical relevance of these findings, we study the effects of generic entry into the pharmaceutical industry by exploiting a large product-level dataset for the US covering the period 1994Q1 to 2003Q4. We find strong empirical support for the model's theoretical predictions. Our estimates rationalize a surprising finding, namely that a molecule that loses patent protection (the originator drug plus its generic competitors) typically experiences a drop in the quantity market share-despite being sold at a fraction of the original price.
Ornaghi, Carmine
33275e47-4642-4023-a195-39c91d0146b0
Siotis, Georges
3de229c7-c594-4ed9-8da4-24ad57646695
Castanheira, Micael
ee506361-6cac-43df-bb2b-e008bc490254
Ornaghi, Carmine
33275e47-4642-4023-a195-39c91d0146b0
Siotis, Georges
3de229c7-c594-4ed9-8da4-24ad57646695
Castanheira, Micael
ee506361-6cac-43df-bb2b-e008bc490254

Ornaghi, Carmine, Siotis, Georges and Castanheira, Micael (2017) The unexpected consequences of asymmetric competition. An application to Big Pharma

Record type: Monograph (Discussion Paper)

Abstract

This paper shows that a pro-competitive shock leading to a steep price drop in one market segment may benefit substitute products. Consumers move away from the cheaper product and demand for the substitutes increases, possibly leading to a drop in consumer surplus. The channel leading to this outcome is non-price competition: the competitive shock on the first set of products decreases the firms' ability to invest in promotion, which cripples their ability to lure consumers. To assess the empirical relevance of these findings, we study the effects of generic entry into the pharmaceutical industry by exploiting a large product-level dataset for the US covering the period 1994Q1 to 2003Q4. We find strong empirical support for the model's theoretical predictions. Our estimates rationalize a surprising finding, namely that a molecule that loses patent protection (the originator drug plus its generic competitors) typically experiences a drop in the quantity market share-despite being sold at a fraction of the original price.

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More information

Published date: January 2017
Organisations: Economics

Identifiers

Local EPrints ID: 410160
URI: http://eprints.soton.ac.uk/id/eprint/410160
PURE UUID: 840def62-4f68-4760-b0f7-2d4e8080c3c3
ORCID for Carmine Ornaghi: ORCID iD orcid.org/0000-0003-2704-2537

Catalogue record

Date deposited: 06 Jun 2017 04:01
Last modified: 16 Mar 2024 03:42

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Contributors

Author: Carmine Ornaghi ORCID iD
Author: Georges Siotis
Author: Micael Castanheira

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