Generics and early entry agreements
Generics and early entry agreements (joint with Annabelle Marxen)
We study the incentives for a monopoly incumbent to reach an early entry agreement with a generic entrant, and its consumer and social welfare effects. In our model entry by more than one entrant is unprofitable. In the absence of an agreement, the entry game has a “grab the dollar” structure, with each generic entering in each period with a low (high) probability if entry costs are high (low). Thus the incumbent can remain a monopolist for some time after patent expiry, until one or more generics finally enter. An early entry agreement guarantees that a single generic enters the market immediately, and allows the incumbent to extract the entrant's profit. It will be reached in equilibrium when entry costs are low or the generic drug authorization process is short. In these instances, early entry agreements also tend to hurt consumers. Allowing for such agreements does however increase social welfare in a benchmark model of vertical differentiation, even when overall competition on the market is reduced. The same holds in a benchmark model with captive consumers and shoppers provide the share of captives is not too high.