Abstract
In pharmaceuticals markets, sellers of branded drugs sometimes sell generic versions of their own branded products, either directly or through license agreements. Although claims that these pseudo-generics may have anti-competitive effects are not unusual, the theoretical literature on this issue is limited and not conclusive. This paper uses a model that combines horizontal and vertical product differentiation, to explain how those effects may occur. We show that the producer of the branded product will not sell the pseudo-generic unless faced with competition and that, if she does so, in some circumstances, all prices rise to the benefit of all sellers and the detriment of consumers.
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Notes
The frequency with which this happens varies considerably from country to country, possibly as a result of legal and institutional differences: Hollis (2002) claims that they represent roughly one quarter of total generic sales in Canada and Australia, and also have strong positions in New Zeland, Germany, the UK and Sweden.
Recall also that t > 0 and β > γ.
Put it another way, in case the incumbent is a multiproduct firm, decreasing the price of the the pseudo-generic has a canibalization effect since part of the demand captured with the price decrease refers to consumers previously buying the other variety sold by the incumbent—the branded product.
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Financial support by Fundação da Ciência e Tecnologia under grant PTDC/EGE-ECO/100296/2008 is acknowledged.
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Rodrigues, V., Gonçalves, R. & Vasconcelos, H. Anti-Competitive Impact of Pseudo-Generics. J Ind Compet Trade 14, 83–98 (2014). https://doi.org/10.1007/s10842-013-0154-0
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DOI: https://doi.org/10.1007/s10842-013-0154-0