Estimating the Causal Effect of Entry on Generic Drug Prices Using Hatch–Waxman Exclusivity
Competition among generics helps keep drug prices low and control medical costs. Good estimates of the effect on price of the entry of another generic competitor would inform competition policy and test oligopoly theories. However, identifying the causal effect of entry is difficult since the number of firms that compete in a market is endogenously determined. We exploit provisions of the 1984 Hatch–Waxman Act to identify a causal effect. We find that ignoring endogenous selection into generic drug markets imparts a significant downward bias to the estimates of the effects of two and three competitors on generic drug prices.
KeywordsGeneric entry Pharmaceutical Prescription drugs Price competition
JEL ClassificationL11 L13 L6
We thank David Schmidt and Steven Tenn for invaluable advice. We also thank Viola Chen, Abe Dunn, Daniel Hosken, Karen Goldman, Kubo Kensuke, Chris Metcalf, Elizabeth Schneirov, Joel Schrag, Christopher Snyder, Aileen Thompson, Mike Vita, and Nathan Wilson for providing helpful comments. Greg Kuczura provided outstanding research assistance. The views expressed in this paper are those of the authors and do not necessarily represent the views of the Federal Trade Commission, any individual Commissioner, the Office of the Comptroller of the Currency, or the U.S. Department of the Treasury.
- Caves, R. E., Whinston, M. D., & Hurwitz, M. A. (1991). Patent expiration, entry, and competition in the U.S. pharmaceutical industry. In Brookings papers on economic activity: Microeconomics (pp. 1–66).Google Scholar
- Federal Trade Commission. (2011). Authorized generic drugs: Short-term effects and long-term impact. https://www.ftc.gov/reports/authorized-generic-drugs-short-term-effects-long-term-impact-report-federal-tradecommission. Accessed 06 April 2018.