Working Paper: CEPR ID: DP14019
Authors: Vilen Lipatov; Damien J. Neven; Georges Siotis
Abstract: This paper discusses, from economic and enforcement perspectives, unilateral conduct aimed at foreclosing the entry of generics. We assume, in line with empirical evidence, that before the entry of generics, competition takes place among originators mostly through non price instruments and in particular, promotion. The entry of generics for one molecule introduces head to head price competition for that molecule and changes competitive interactions among the originators that remain patent protected. First, we develop a model in which competition takes place through price and promotion and analyse the consequence of unilateral conduct preventing the entry of generics, thus prolonging the status quo. We find that that the extent to which this conduct reduces consumer welfare (if at all) depends on whether promotion enhances the utility of users and whether promotion also involves business stealing. In order to provide some guidance for enforcement, we characterise the competitive outcome that prevails before entry in terms of consumer welfare. We find that unlike what happens with price competition, common indicators of performance such as the number of firms, the level of concentration (for a given number of firms) and the intensity of rivalry might be negatively associated with consumer welfare. As a consequence, the foreclosure of entrants might lead to welfare losses even when the status quo involves intense non-price competition and low concentration. Finally, we consider how unilateral conduct towards generic entry can be dealt with in the current enforcement framework. In the Servier and Paroxetine cases, the foreclosure of generics has been framed as an abuse of a dominant position held by the originator before entry, in spite of evidence of non-price competition. We show that it would be preferable to frame the conduct as an abuse of the dominant position that the originator holds in the molecule market as a consequence of its patent. In such a framework, the dominant position is instrumental in making exclusion feasible.
Keywords: foreclosure; pharmaceutical industry; nonprice competition; abuse of dominance
JEL Codes: K21; I11; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unilateral conduct aimed at preventing generic entry (L12) | reduction in consumer welfare (D11) |
| promotional activities enhance user utility (L15) | mitigated negative impact of preventing entry (F69) |
| foreclosure of generic entrants (L49) | welfare losses (D69) |
| intense non-price competition and low concentration (L13) | unreliable measures of consumer welfare (D11) |
| dominant position conferred by patents (K11) | preemption of generic entry (L49) |