Reputation and Entry Deterrence: A Structural Empirical Model of Fighting Brands in the U.S. Pharmaceutical Marke

The 1984 Hatch-Waxman Act grants a 180-day exclusivity to the first generic firm which successfully challenges a brand-name drug's patents. In this period, the patent challenger is the only generic firm allowed to sell. In the early 1990s, brand-name firms responded by marketing their own "authorized generic" drugs. Brand-name firms argue that authorized generics increase short-run profits while generic patent challengers report losses due to authorized generics and see their purpose as to deter future generic entrants. The FTC is now studying whether launching authorized generics is predatory.;Authorized generics have both a short-run profit effect and a long-run firm reputation effect. Within the exclusivity period, a brand-name firm may or may not be able to cover the fixed cost of an authorized generic drug. In the long-run, if a brand-name firm has a consistent history of fighting, potential generic entrants will infer a higher probability to its fighting future challenges, and will be more reluctant to enter this brand-name firm's markets. Therefore, the fact that a brand-name firm earns lower profits within the exclusivity period by fighting an entrant implies that launching authorized generics is only to pursue firm reputation. Hence it is predatory.;I collect a dataset which includes 344 brand-name drugs produced by 18 brand-name firms, their corresponding generic entrants and authorized generics. In the structural model, I estimate demand functions and recover firms' cost structures. The estimates show the reputation effect only accounts for less than 10% of the extra value the brand-name firm gains by fighting an entrant. Therefore launching authorized generics should not be viewed as predatory behavior. Excluding the firm reputation from the model does not change the entry frequency and the launching frequency significantly. Counterfactual policy experiments show the number of generic entrants would increase by 14.94% if the FTC forbids brand-name firms from launching authorized generics.;JEL Code: K21, L13, L41, L65.