The impact of generic goods in the pharmaceutical industry

This paper studies the effects of generic drugs in the pharmaceutical indus try. Two firms produce two branded goods, with a different active ingredien t, and the patent for one of them has expired, so that a generic alternativ e is in the market. This paper focuses on the case where the branded goods are perfect substitutes and where there exists a degree of differentiation between the branded and the generic goods. The study looks at whether the f irm producing the branded good whose patent has expired has incentives to p roduce its own generic alternative too. For this purpose, the scenario wher e the firm producing the branded good also produces the generic drug is com pared with the situation where the generic good is produced by a third firm . It is found that the firm producing the branded good has incentives to pr oduce its generic alternative, owing to a market segmentation effect. This induces an increase in the price of the branded good produced by this firm, which in turn implies a welfare reduction. (C) 1999 John Wiley & Sons, Ltd .