Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration

This paper develops a new approach to testing for strategic entry deterrence and applies it to the behavior of pharmaceutical incumbents just before they lose patent protection. The approach involves looking at a cross-section of markets and examining whether behavior is nonmonotonic in the size of the market. Under certain conditions, investment levels will be monotone in market size if firms are not influenced by a desire to deter entry. Strategic investments, however, may be nonmonotone because entry deterrence is unnecessary in very small markets and impossible in very large ones, resulting in overall nonmonotonic investment. The pharmaceutical data contain advertising, product proliferation, and pricing information for a sample of drugs which lost patent protection between 1986 and 1992. Among the findings consistent with an entry deterrence motivation are that incumbents in markets of intermediate size have lower levels of advertising and are more likely to reduce advertising immediately prior to patent expiration.

[1]  Hugh D. Walker.  Market power and price levels in the ethical drug industry , 1971 .

[2]  D. Gaskins,et al.  Dynamic limit pricing: Optimal pricing under threat of entry , 1971 .

[3]  D Schwartzman.  "Innovation in the Pharmaceutical Industry". , 1978, British medical journal.

[4]  R. Schmalensee.  Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry , 1978 .

[5]  A. Dixit.  The Role Of Investment In Entry-Deterrence , 1980 .

[6]  David D. Van Tassel,et al.  Taking Your Medicine: Drug Regulation in the United States , 1980 .

[7]  Richard Schmalensee,et al.  Economies of Scale and Barriers to Entry , 1981, Journal of Political Economy.

[8]  K. Leffler,et al.  Persuasion or Information? The Economics of Prescription Drug Advertising , 1981, The Journal of Law and Economics.

[9]  Paul R. Milgrom,et al.  Good News and Bad News: Representation Theorems and Applications , 1981 .

[10]  Paul R. Milgrom,et al.  LIMIT PRICING AND ENTRY UNDER INCOMPLETE INFORMATION: AN EQUILIBRIUM ANALYSIS' , 1982 .

[11]  D. Fudenberg,et al.  Learning-by-Doing and Market Performance , 1983 .

[12]  Drew Fudenberg,et al.  Capital as a commitment: Strategic investment to deter mobility , 1983 .

[13]  K. Judd,et al.  EQUILIBRIUM PRICE DISPERSION , 1983 .

[14]  S. Salop,et al.  Judo Economics: Capacity Limitation and Coupon Competition , 1983 .

[15]  D. Fudenberg,et al.  The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look , 1984 .

[16]  J. Geanakoplos,et al.  Multimarket Oligopoly: Strategic Substitutes and Complements , 1985, Journal of Political Economy.

[17]  K. Judd.  Credible Spatial Preemption , 1985 .

[18]  R. Steiner,et al.  Generic Substitution and Prescription Prices: Economic Effects of State Drug Product Selection Laws , 1985 .

[19]  J. Harrington,et al.  Limit Pricing When the Potential Entrant Is Uncertain of Its Cost Function [Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis] , 1986 .

[20]  W. S. Comanor,et al.  The political economy of the pharmaceutical industry. , 1986, Journal of economic literature.

[21]  Thomas E. Cooper.  Most-Favored-Customer Pricing and Tacit Collusion , 1986 .

[22]  Drew Fudenberg,et al.  A "Signal-Jamming" Theory of Predation , 1986 .

[23]  Marvin B. Lieberman,et al.  Postentry Investment and Market Structure in the Chemical Processing Industries , 1987 .

[24]  P. Klemperer.  The Competitiveness of Markets with Switching Costs , 1987 .

[25]  J. Tirole.  The Theory of Industrial Organization , 1988 .

[26]  R. Smiley,et al.  Empirical evidence on strategic entry deterrence , 1988 .

[27]  Richard E. Caves,et al.  Persuasion or Information? Promotion and the Shares of Brand Name and Generic Pharmaceuticals , 1988, The Journal of Law and Economics.

[28]  David S. Salkever,et al.  Pricing, Patent Loss and the Market for Pharmaceuticals , 1991 .

[29]  Richard E. Caves,et al.  Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical Industry , 1991 .

[30]  Pricing, Patent Loss and the Market for Pharmaceuticals , 1991 .

[31]  Henry G. Grabowski,et al.  Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act , 1992, The Journal of Law and Economics.

[32]  A. Sapienza.  Setting the record straight: The office of technology assessment report—pharmaceutical R&D costs, risks, and rewards , 1993 .

[33]  Zvi Griliches,et al.  Generics and New Goods in Pharmaceutical Price Indexes , 1993 .

[34]  G. Urban,et al.  Information, marketing, and pricing in the U.S. antiulcer drug market. , 1995, The American economic review.

[35]  D. Salkever,et al.  "Generic Entry and the Pricing of Pharmaceuticals" , 1995 .

[36]  Judith A. Chevalier,et al.  Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing , 1995 .

[37]  Judith A. Chevalier,et al.  Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry , 1995 .

[38]  Vrinda Kadiyali.  Entry, its Deterrence, and its Accommodation: A Study of the U.S. Photographic Film Industry , 1996 .

[39]  Bae Jp.  Drug patent expirations and the speed of generic entry. , 1997 .

[40]  J. Bae.  Drug patent expirations and the speed of generic entry. , 1997, Health services research.

[41]  Z. Griliches,et al.  Characteristics of demand for pharmaceutical products: an examination of four cephalosporins. , 1997, The Rand journal of economics.

[42]  John H. Kagel,et al.  Signalling and Adaptive Learning in an Entry Limit Pricing Game , 1997 .

[43]  S. Schweitzer.  Pharmaceutical Economics and Policy , 1997 .

[44]  M. C. Jones,et al.  Testing Monotonicity of Regression , 1998 .

[45]  What prices can tell us about the market for antibiotics , 1998 .

[46]  Glenn Ellison,et al.  A Simple Framework for Nonparametric Specification Testing , 1998 .

[47]  Subhashis Ghosal,et al.  TESTING MONOTONICITY OF REGRESSION By , 1998 .

[48]  F. Morton,et al.  Entry decisions in the generic pharmaceutical industry. , 1999, The Rand journal of economics.

[49]  J. Rizzo,et al.  Advertising and Competition in the Ethical Pharmaceutical Industry: The Case of Antihypertensive Drugs* , 1999, The Journal of Law and Economics.

[50]  Subhashis Ghosal,et al.  Testing monotonicity of a regression function. , 2000 .

[51]  Alan T. Sorensen.  Equilibrium Price Dispersion in Retail Markets for Prescription Drugs , 2000, Journal of Political Economy.

[52]  Irène Gijbels,et al.  Tests for monotonicity of a regression mean with guaranteed level , 2000 .

[53]  Fiona M. Scott Morton.  Barriers to entry, brand advertising, and generic entry in the US pharmaceutical industry , 2000 .

[54]  P. Hall,et al.  Linear functions , 2018, Algebra and Geometry.

[55]  Christopher M. Snyder,et al.  Countervailing Power in Wholesale Pharmaceuticals , 2001 .

[56]  E. Berndt,et al.  Promotion of prescription drugs to consumers. , 2002, The New England journal of medicine.

[57]  Generic Drug Industry Dynamics , 2002 .

[58]  N. Rudholm,et al.  The Relative Importance of Actual and Potential Competition : Empirical Evidence From the Pharmaceuticals Market , 2003 .

[59]  Xiaohong Chen,et al.  Semi‐Nonparametric IV Estimation of Shape‐Invariant Engel Curves , 2003 .

[60]  W. Newey,et al.  Instrumental variable estimation of nonparametric models , 2003 .

[61]  How Do Incumbents Respond to the Threat of Entry on Their Networks? Evidence from the Major Airlines , 2004 .

[62]  Leemore S. Dafny.  Games Hospitals Play: Entry Deterrence in Hospital Procedure Markets , 2005 .

[63]  Bart J. Bronnenberg,et al.  Endogenous sunk costs and the geographic distribution of brand shares in consumer package goods industries. , 2005 .

[64]  Vrinda Kadiyali,et al.  Entry-Deterring Capacity in the Texas Lodging Industry , 2006 .

[65]  Catherine Wolfram,et al.  Coordinating on lower prices: pharmaceutical pricing under political pressure. , 2006, The Rand journal of economics.

[66]  Murat F. Iyigun,et al.  Patent Protection and Strategic Delays in Technology Development: Implications for Economic Growth , 2006 .

[67]  C. L. Benkard,et al.  Estimating Dynamic Models of Imperfect Competition , 2007 .

[68]  Demian Pouzo,et al.  Estimation of Nonparametric Conditional Moment Models with Possibly Nonsmooth Moments , 2008 .

[69]  Tracy L. Regan.  Generic entry, price competition, and market segmentation in the prescription drug market , 2008 .