Generic Entry and the Pricing of Pharmaceuticals

During the 1980s the share of prescriptions sold by retail pharmacies that was accounted for by generic products roughly doubled. The price response to generic entry of brand-name products has been a source of controversy. In this paper we estimate models of price responses to generic entry in the market for brand-name and generic drugs. We study a sample of 32 drugs that lost patent protection during the early to mid-1980s. Our results provide evidence that brand-name prices increase after generic entry and are accompanied by large decreases in the price of generic drugs. Copyright (c) 1997 Massachusetts Institute of Technology.