Strategic behavior and entry deterrence by branded drug firms: the case of authorized generic drugs

Pharmaceutical firms that market brand-name drugs lose substantial market share to generic manufacturers after patent expiration. As a response to the threat of generic competition, branded manufacturers pursue defensive strategies. One such strategy is the launch of authorized generic drugs. Authorized generic drugs are produced by branded manufacturers to compete against other generic drug entrants. Such competition may lower the expected profits of generic drug manufacturers and hence deter future generic drug entry. This paper models and empirically examines whether the introduction of authorized generic drugs changes the independent generic firms’ decisions on entering the market. We use an instrumental variable approach to evaluate the effect of authorized generic drugs on the responses of generic manufacturers. The results show that the entry of authorized generic drugs deters and delays the entry of generic drugs.