Effect of multiple source entry on price competition after patent expiration in the pharmaceutical industry

This study analyzed the effect of multiple source entry on price competition after patent expiration in the pharmaceutical market. Thirty-five chemical entities whose patents expired from 1984 through 1987 were selected. Panel data were used for originator and multiple source drugs (MSDs) from 1980 through 1990. A theoretical model was developed as a framework to determine significant factors of price competition. This model assumed that the pharmaceutical market is imperfectly segmented. Consumers' savings were estimated based on the change in consumer surplus after entry of MSDs.;The data showed that originator prices continue to increase after patent expiration, while the price of MSDs significantly decreased over time. These results are consistent with the study model. Potential profit after patent expiration induces entry of MSDs. Over time more MSDs enter the price sensitive part of the market resulting in increased competition. This increased price competition for the price sensitive market caused the average price of MSDs to decrease. As the price of MSDs decreased the more price sensitive consumers switched from an originator to the lower priced MSDs. This results in the originator market share decreasing and only the most price inelastic consumers remain. Therefore, the demand curve for originators becomes more inelastic and the originator price continues to increase.;Even though the price of originators averages three times higher than MSDs, originators maintains three quarters of the market in dollars and half in quantity four years after patent expiration. The Fisher price index for originators rose by 20 percent during three years after patent expiration. Whereas, the price index for MSDs decreased by 35 percent by two years after entry.;The study concluded that after patent expiration an MSD competes directly with other MSDs in the price sensitive sector of the market, but only indirectly with the originator in the insensitive sector of the market. Consumers gain savings from entry of MSDs, and the amount of savings increases over time. The study can provide information to pharmaceutical companies on factors which influence price competition and to policy makers on methods for achieving consumer savings.