NANCY Seminar – Izabela JELOVAC (CNRS – GATE Lyon)

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Title: The generic competition un-paradoxed

Abstract: This paper provides a simple explanation for the generic paradox, that is, the empirical observation that the price of many brand-name drugs increases after patent expiry and generic entry. This explanation is based on the different price setting mechanisms under patent protection and after. Before patent expiry, a monopoly producer and an insurer (public or private) generally negotiate drug prices. After patent expiry, generic producers can enter the market and compete in price with each other and the brand-name drug producer. Many insurers impose reference pricing so as to boost such competition. In our analysis, we derive conditions under which the prices of brand-name drugs increase after the patent expiration and the entry of generic competitors on the market. Using a simple and adapted model of Nash bargaining and one of imperfect price competition with reference pricing, we show that the generic paradox can occur whenever health insurance is generous enough and the perceived quality of generics by patients is poor.