Cui, Qinquan;
Arifoğlu, Kenan;
Zhan, Dongyuan;
(2023)
Generic Competition Paradox and the Role of Information Asymmetry in Pharmaceutical Markets.
SSRN: Amsterdam, Netherlands.
Preview |
Text
Cui et al. (2023)--Generic Competition Paradox and the Role of Information.pdf - Other Download (1MB) | Preview |
Abstract
Contrary to traditional economic theory predicting lower prices with increased competition, we observe a paradoxical increase in some brand-name drug prices following the entry of generic alternatives (i.e., the Generic Competition Paradox (GCP)). This paradox has led to increased healthcare spending and attracted significant academic interest. However, much of the current research, focusing on consumer heterogeneity and pseudo-generic drugs and attributing the GCP primarily to these factors, overlooks the extensive market and consumer knowledge possessed by brand-name firms and the resulting information asymmetry between brand-name and generic firms. Thus, it fails to fully explain the GCP and to provide a comprehensive understanding of pharmaceutical markets. To bridge this gap, by considering the brand-name firm's private information about consumers, we develop a game-theoretic model to analyse interactions between a brand-name firm and a generic firm over two periods (signaling and full-information). We find that the brand-name firm can use limit pricing in the signaling period to deter generic entry by charging below its monopoly price, then increase its price and allow generic entry in the full-information period, leading to the GCP. Consequently, under information asymmetry, limit pricing may arise from the brand-name firm's anticompetitive practices, and offers an alternative explanation for the GCP. While limit pricing and the GCP often result in higher drug prices, reduced consumer choice, and increased healthcare spending, we find that they can sometimes benefit consumers and society. This finding challenges the widely accepted belief that information asymmetry and the GCP are always detrimental, highlighting their complex role in pharmaceutical markets.
| Type: | Working / discussion paper |
|---|---|
| Title: | Generic Competition Paradox and the Role of Information Asymmetry in Pharmaceutical Markets |
| Open access status: | An open access version is available from UCL Discovery |
| Publisher version: | https://doi.org/10.2139/ssrn.4660532 |
| Language: | English |
| Additional information: | This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | Generic competition paradox, limit pricing, information asymmetry, brand-name drug, pharmaceutical industry |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management |
| URI: | https://discovery-pp.ucl.ac.uk/id/eprint/10183754 |
Archive Staff Only
 |
View Item |
