Working Paper: NBER ID: w29886
Authors: Amanda Starc; Thomas G. Wollmann
Abstract: Entry represents a fundamental threat to cartels. We study the extent and effect of this behavior in the largest price-fixing case in US history, which involves generic drug manufacturing. We link information on the cartel’s internal operations to regulatory filings and market data. There is a substantial increase in entry after cartel formation but regulatory approvals delay most entrants by 2-4 years. We then estimate a structural model to simulate counterfactual equilibria. Absent entry, cartel profits would be dramatically higher. Correspondingly, reducing regulatory delays by just 1-2 years equates to consumer compensating variation of $559 million-$1.3 billion.
Keywords: Entry; Collusion; Generic Drugs; Price Fixing; Regulatory Delays
JEL Codes: L11; L41; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price increase (D49) | Increase in entry (F29) |
| Regulatory delays (L51) | Hinder immediate entry (Y20) |
| Reduction in regulatory delays (L51) | Increase in consumer welfare (D69) |
| Entry (Y20) | Reduces cartel profits (L42) |
| Entry (Y20) | Lowers prices (D41) |
| Entry (Y20) | Smaller market shares for incumbent cartel members (D43) |
| Cartel formation (L12) | Increase in entry (F29) |
| Cartel formation (L12) | Price increase (D49) |