Estimating the Effect of Entry on Generic Drug Prices Using Hatch-Waxman Exclusivity

Luke M. Olson, Brett W. Wendling
Working Paper:
Published In:
Review of Industrial Organization

Generic drugs play an important role in disciplining drug prices and controlling rising drug costs. However, the effect that an additional generic drug competitor has on drug prices is difficult to measure because the number of firms competing in a market is endogenously determined. We identify the causal effects of a second and a third generic competitor on generic drug prices by exploiting the 180-day period of marketing exclusivity created by provisions of the Hatch- Waxman Act. The effects of the second and third competitors on price have important implications for drug competition policy and the interpretation of theory relating price to competition in generic drug markets. We find significant biases associated with estimates that do not properly account for endogenous entry. Specifically, we find that the failure to account for endogenous entry leads to significant underestimation of the effects of two and three competitors on generic drug prices, especially among large drugs.