Markups and Fixed Costs in Generic and Off-Patent Pharmaceutical Markets
There is wide dispersion in pharmaceutical prices across countries with comparable quality standards. Under monopoly, off-patent and generic drug prices are at least four times higher in the United States than in comparable English-speaking high income countries. With five or more competitors, off-patent drug prices are similar or lower. Our analysis shows that differential US markups are largely driven by the market power of drug suppliers and not due to wholesale intermediaries or pharmacies. Furthermore, we show that the traditional mechanism of reducing market power – free entry – is limited because implied entry costs are substantially higher in the US.
Thanks to Joe Shapiro, Chris Snyder, Steve Berry, Fiona Scott Morton, Jason Abaluck, Jon Skinner, Leila Agha, John Rust, Nina Pavcnik, Stuart Craig, Samuel Moy and seminar participants. Thanks to Serena Sampler and Ray McCormick for excellent research assistance. Part of this research was conducted while Ganapati was a Fellow at Dartmouth College and at Ludwig-Maximilians-Universität Munich. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.