A DYNAMIC OLIGOPOLY STRUCTURAL MODEL FOR THE PRESCRIPTION DRUG MARKET AFTER PATENT EXPIRATION资料.pdf

INTERNATIONAL ECONOMIC REVIEW Vol. 51, No. 4, November 2010 A DYNAMIC OLIGOPOLY STRUCTURAL MODEL FOR THE PRESCRIPTION DRUG MARKET AFTER PATENT EXPIRATION∗ BY ANDREW T. CHING1 University of Toronto, Canada This article incorporates consumer learning and heterogeneity into a dynamic oligopoly model for the prescription drug market. In the model, both firms and patients need to learn the generic qualities via patients’ experiences, generic firms’ entry decisions are endogenous, but their entry timings depend on a random approval process. I apply the model to examine the impact of shortening the expected generic approval time. Although this policy experiment brings generics to the market sooner, it increases a potential entrant’s likelihood of entering a crowded market and hence could reduce the total number of generic entrants and consumer welfare. 1. INTRODUCTION In 1984, Congress passed legislation (the Hatch-Waxman Act) to eliminate the clinical trial study requirements for approving generic drugs. Prior to 1984 there were few generic en- trants. By making generic entry easier, this policy change has made low cost generics much more accessible to the public. However, many patients, physicians and pharmacists are re- luctant to prescribe or use generic as they are uncertain about generic quality. This type of concern was particularly serious during the 1980s when generics were relatively new (Mason and Bearden, 1980; Carroll and Wolfgang, 1991; Strutton et al., 1992). The prevalence of generic entry in the post-1984 period therefore creates an ideal situation for studying firm’s entry and pricing behavior and market evolution when there is uncertainty about the product quality. Past research has documented two stylized facts that c