Does Entry Remedy Collusion? Evidence from the Generic Prescription Drug Cartel
Entry represents a fundamental threat to cartels engaged in price fixing. We study the extent and effect of this behavior in the largest price fixing case in US history, which involves generic drugmakers. To do so, we link information on the cartel’s internal operations to regulatory filings and market data. We find that collusion induces significant entry, which in turn reduces prices. However, regulatory approvals delay most entrants by 2-4 years. We then estimate a structural model to assess counterfactual policies. We find that reducing regulatory delays by just 1-2 years equates to consumer compensating variation of $597 million-$1.52 billion.
We thank John Asker, Emily Cuddy, Kathleen Hui, Michi Igami, Rob Porter, Fiona Scott Morton, Mike Sinkinson, Bob Topel, Brett Wendling, as well as seminar participants at the Wisconsin, Stanford, Chicago Booth, 2020 Midwest IO Fest, and 2022 ASSA/AEA Annual Meeting for their comments. We benefited immensely from conversations with Doni Bloomfield, with whom we have related work. Paulo Ramos provided not only superb research assistance but also substantive contributions to the model and its estimation. Paloma Avendano also provided excellent research assistance. Wollmann thanks the Becker Friedman Institute’s Industrial Organization Initiative for support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.