Biomedical Engineering Reference
In-Depth Information
Hong et al. (
2005
) fi nd that the price rigidity of branded drugs after patent expiry
is due to the introduction of line extensions of the branded drug. As line extensions
are closely related to the branded drug that loses its patent, the manufacturer sus-
tains the price of the branded drug to increase the demand for its extension. This is
in line with Kadiyali et al. (
1996
), who fi nd that line extensions decrease the origi-
nal product's cross-price elasticity to competitors.
Ching (
2010
) fi nds evidence that myopic fi rms would set their price after patent
expiry higher than long-term oriented fi rms, who take the learning about generic
quality into account. A lower price for branded drugs decreases learning about the
quality of generics.
8.3.2
Promotion
Manufacturers use the period in which the branded drug is protected by a patent to
build the brand equity of the drug without direct competition of bioequivalent gener-
ics. Traditionally this brand equity is build among doctors using detailing, sam-
pling, and journal advertising. The increase in direct to consumer advertising
(DTCA) since 1997, when the regulations on DTCA have been loosened, has
allowed fi rms to also actively build brand equity among patients. The resulting
goodwill concerns differences in quality between the branded and generic drug and
induces doctors to keep on prescribing branded drugs when generics are available
(Caves et al.
1991
; Hurwitz and Caves
1988
). These quality differences can arise by
a higher quality control for branded manufacturers as generic manufacturers have
fewer reputational assets to lose from lower quality control. Also quality percep-
tions of properties of branded drugs can be higher, such as formulation and stability.
For example, branded drugs are perceived higher in effectiveness and lower in side
effects, though the difference in quality perceptions has decreased over the last 40
years (Ganther and Kreling
2000
; Hassali et al.
2009
).
Hurwitz and Caves (
1988
) fi nd that advertising before and after patent expiry pre-
serves the branded drug's market share, because it builds brand loyalty. Higher brand
equity slows down the impact of generic entry (Kvesic
2008
). However, while most
branded drugs lose market share quickly after patent expiry, for some brands it pays
off to keep marketing their brand, such as Intal and Coumadin (Parece et al.
2004
),
especially when the technology is complicated and the brand's sales are relatively low.
Rizzo (
1999
) fi nds that advertising decreases price sensitivity and thereby inhib-
its generic entry. Königbauer (
2007
) fi nds that over-investing in advertising before
patent expiry has the potential to deter entry, but decreases social welfare. Scott
Morton (
2000
) empirically investigates whether branded advertising creates a bar-
rier to entry for generic drugs after patent expiration. She distinguishes between
informative and persuasive advertising. The latter merely persuades consumers of
product differentiation between the brand and generic, while almost none exists,
and may create a barrier to entry for generic fi rms. In contrast to earlier work inves-
tigating the relation between advertising and generic entry, she treats advertising as
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