Competition in prescription drug markets: the roles of trademarks, advertising, and generic names

Abstract

We take on two subjects of controversy among economists—advertising and trademarks—in the context of the market for generic drugs. We outline a model in which trademarks for drug names reduce search costs but increase product differentiation. In this particular framework, trademarks may not benefit consumers. In contrast, the generic names of drugs or “International Nonproprietary Names” (INN) have unquestionable benefits in both economic theory and empirical studies. We offer a second model where advertising of a brand-name drug creates recognition for the generic name. The monopoly patent-holder advertises less than in the absence of a competitive spillover.

This is a preview of subscription content, log in to check access.

Notes

  1. 1.

    The origins of the anti-competitive view of trademarks can be found in Edward Chamberlin’s [8] theory of monopolistic competition, in which consumers perceive non-price differences among competing products. Dorfman and Steiner extended this theory by assuming that firms can use advertising to create these perceived differences.

  2. 2.

    According to Landes and Posner [25], p. 269), trademarks and brand names are “rough synonyms”; we treat them as such in this paper.

  3. 3.

    For example, the chemical name of Lipitor, the top-selling prescription drug in the word, is (3R,5R)-7-[2-(4-fluorophenyl)-3-phenyl-4-(phenylcarbamoyl)-5-propan-2-ylpyrrol-1-yl]-3,5-dihydroxyheptanoic acid. The generic name or INN is ‘Atorvastatin’.

  4. 4.

    These regulations are not easy to enforce when medical representatives “detail” drugs to physicians in private conversations. Despite this loophole, we believe that advertising of the brand-name medicine has external effects.

  5. 5.

    Königbauer [23] offers another reason why brand-name advertising may create a market for the generic drug: advertising that convinces prescribing physicians that brand and generic drugs are distinct (even though they are not) makes generic entry profitable. Without differentiation, the brand and generic drug makers might engage in Bertrand competition over price that dissipates the profits. An anonymous reviewer commented that profit dissipation would be unlikely in a market with few sellers.

  6. 6.

    The US and the EU adopted INN for generic drugs in these years. Lobo and Feldman [28] discuss the history of the INN nomenclature. Boland [4] also discusses the history of federal regulation of prescription drug labeling and advertising in the US.

  7. 7.

    Fanfan-Portet et al. [12] found that both patient and physician characteristics influence the choice of generic versus brand-name drugs in Belgium’s reference price system.

  8. 8.

    We use subscripts to denote partial derivatives, for example, H T = δHT.

  9. 9.

    Landes and Posner suggest that in most cases W, as they have defined it, will be too large to affect the analysis.

  10. 10.

    A specific example of what we mean by the “unit cost” of common language is the drug Darvon, which before the adoption of INN was burdened with the generic name dextropropophypene hydrochoroide. It is now known as propoxyphene, a name that is much easier to use. In general, INN are distinctive in sound and spelling, not inconveniently long, and not liable to be confused with names in common use. These features of INN reduce the cost of using common language. In contrast, similar sounds and spelling are quantifiable risk factors for confusion over brand names [24]. The frequency and cost of confusion errors, expressed on a per-prescription basis, might be used to quantify the cost of trademarks.

  11. 11.

    Detailed derivations of Eqs. (3), (4), and (5) are available from the authors.

  12. 12.

    Although the future competitive consequences of advertising should be discounted, drug manufacturers sometimes advertise heavily late in the life-cycle of a drug. For example, between January 2006 and September 2007 Pfizer spent $258 million advertising Lipitor, even as the drug was headed toward patent expiration [40].

  13. 13.

    Caves, et al. [7] suggest that a “significant component of sales promotion activity for branded drugs is of the ‘market expansion’ variety.” Berndt et al. [2] note that lower-priced generics can capture a large portion of sales from additional marketing as patent expiration on the brand name dug approaches.

  14. 14.

    The prices in this study and others are at the wholesale level. This makes a considerable difference because retailers take larger margins on generic drugs than on branded drugs.

References

  1. 1.

    Appelt, S.: Early Entries and Trademarks—Barriers to Generic Entry in the German Pharmaceutical Industry? Paper presented at the DRUID-DIME Academy Winter 2009 PhD Conference, viewed at http://www2.druid.dk/conferences/viewabstract.php?id=4403&cf=33. June 5, 2011 (2009)

  2. 2.

    Berndt, E.R., Kyle, M.K., Ling, D.C.: The long shadow of patent expiration: Generic entry and Rx-to-OTC switches. In: Feenstra, R.C., Shapiro, M.D. (eds.) Scanner data and price indices. University of Chicago Press, Chicago (2003)

    Google Scholar 

  3. 3.

    Berndt, E.R., Aitken, M.L.: Brand loyalty, generic entry and price competition in pharmaceuticals in the quarter century after the 1984 Waxman-Hatch legislation. Int. J. Econom. Business 18(2), 177–201 (2011)

    Article  Google Scholar 

  4. 4.

    Boland, G.L.: Federal regulation of prescription drug advertising and labeling. Boston College Law Rev. 12(2), 203–266 (1970)

    Google Scholar 

  5. 5.

    Bond, R.S., Lean, D.S.: Sales, promotion and product differentiation in two prescription drug markets. Staff Report, Bureau of Economics. US Federal Trade Commission, Washington, DC (1977)

    Google Scholar 

  6. 6.

    Carlton, D.W., Perloff, J.M.: Modern industrial organization. Foresman, Glenview (1990). Appendix 18A

    Google Scholar 

  7. 7.

    Caves, R.E., Whinston, M.D., Hurwitz, M.A., Pakes, A., Temin, P.: Patent expiration, entry and competition in the US pharmaceutical industry. Brookings Papers on Economic Activity: Microeconomics, pp. 1–66. Brookings Institution, Washington, DC (1991)

    Google Scholar 

  8. 8.

    Chamberlin, E.H.: The theory of monopolistic competition. Harvard University Press, Cambridge (1933)

    Google Scholar 

  9. 9.

    Ching, A.T.: A dynamic oligopoly structural model for the prescription drug market after patent expiration. Int. Econom. Rev. 51(4), 1175–1207 (2010)

    Article  Google Scholar 

  10. 10.

    Dorfman, R., Steiner, P.O.: Optimal advertising and optimal product quality. Am. Econom. Rev. 44, 826–836 (1954)

    Google Scholar 

  11. 11.

    Economides, N.S.: The economics of trademarks. Trademark Rep. 78(4), 523–539 (1988)

    Google Scholar 

  12. 12.

    Fanfan-Portet, M.-I., Van de Voorde, C., Vrijens, F., Stichele, R.V.: Patient socioeconomic determinants of the choice of generic versus brand name drugs in the context of a reference price system: Evidence from Belgian prescription data. Eur. J. Health Econ. 13(3), 301–313 (2012)

    Article  Google Scholar 

  13. 13.

    Frank, R.G.: The ongoing regulation of generic drugs. New Engl. J. Med. 357(20), 1993–1996 (2007)

    PubMed  Article  CAS  Google Scholar 

  14. 14.

    Frank, R.G., Salkever, D.S.: Generic entry and the pricing of pharmaceuticals. J. Econom. Manage. Strat. 6(1), 75–90 (1997)

    Article  Google Scholar 

  15. 15.

    Gorecki, P.: The importance of being first: the case of prescription drugs in Canada. Int. J. Ind. Organ. 4, 371–395 (1986)

    Article  Google Scholar 

  16. 16.

    Gorecki, P.: Barriers to entry in the canadian pharmaceutical industry: Comments, clarifications and extensions. J. Health Econ. 6, 59–72 (1987)

    PubMed  Article  CAS  Google Scholar 

  17. 17.

    Grabowski, H.G., Vernon, J.M.: Brand loyalty, entry and price competition in pharmaceuticals after the 1984 Drug Act. J. Law Econ. 35, 331–350 (1992)

    Article  Google Scholar 

  18. 18.

    Grabowski, H.G., Vernon, J.M.: Longer patents for increased generic competition in the US: The Waxman-Hatch act after one decade. Pharmacoeconomics 10(Suppl. 2), 110–123 (1996)

    PubMed  Article  Google Scholar 

  19. 19.

    Hollis, A.: The importance of being first: Evidence from Canadian generic pharmaceuticals. J. Health Econ. 11, 723–734 (2002)

    Article  Google Scholar 

  20. 20.

    Huckfeldt, P.J., Knittel, C.R.: Pharmaceutical use following generic entry: paying less and buying less. Cambridge, MA: National Bureau of Economic Research, Working Paper 17046, viewed at http://www.nber.org/papers/w17046, accessed 17 April 2012 (2011)

  21. 21.

    Hurwitz, M.A., Caves, R.E.: Persuasion or information? Promotion and the shares of brand name and generic pharmaceuticals. J. Law Econ. 31, 299–320 (1988)

    Article  Google Scholar 

  22. 22.

    Kavanos, P., Costa-Font, J., Seeley, E.: “Competition in off-patent drug markets: Issues. Regulation and Evidence, Economic Policy 23(55), 499–544 (2008)

    Article  Google Scholar 

  23. 23.

    Königsbauer, I.: Advertising and generic market entry. J. Health Econ. 26, 286–305 (2007)

    Article  Google Scholar 

  24. 24.

    Lambert, B.L., Lin, S.-J., Chang, Ken.-Yu., Gandhi, S.K.: Similarity as a risk factor in drug name confusion errors: The look-alike (Orthographic) and sound-alike (Phonetic) model. Med. Care 37(12), 1214–1225 (1999)

    PubMed  Article  CAS  Google Scholar 

  25. 25.

    Landes, W.M., Posner, R.A.: Trademark law: an economic perspective. J. Law Econ. 30(2) (October), pp. 265–309. An adaptation (with no equations) is “The Economics of Trademark Law,” The Trademark Reporter, 78(3), 1988, 267–306 (1987)

  26. 26.

    Leffler, K.B.: Persuasion or information? The economics of prescription drug advertising. J. Law Econ. 24, 45–74 (1981)

    Article  Google Scholar 

  27. 27.

    Lexchin, J.: The effect of generic competition on the price of brand-name drugs. Health Policy 68, 47–54 (2004)

    PubMed  Article  Google Scholar 

  28. 28.

    Lobo, F., Feldman, R.: Generic Drug Names and Social Welfare. Department of Economics, Universidad Carlos III de Madrid, working paper (2011)

  29. 29.

    López-Casasnovas, G., Puig-Junoy, J.: Review of the literature on reference pricing. Health Policy 54(2), 87–123 (2000)

    PubMed  Article  Google Scholar 

  30. 30.

    Masson, A., Steiner, R.L.: Generic substitution and prescription drug prices: economic effects of state drug product selection laws. US Federal Trade Commission, Bureau of Economics, Washington, DC (1985)

    Google Scholar 

  31. 31.

    McClure, D.M.: Trademarks and competition: the recent history. Law and Contemporary Problems 59(2), 13–43 (1996)

    Article  Google Scholar 

  32. 32.

    McRae, J.J., Tapon, F.: Some empirical evidence on post-patent barriers to entry in the Canadian pharmaceutical industry. J. Health Econ. 4, 43–61 (1985)

    PubMed  Article  CAS  Google Scholar 

  33. 33.

    Mestre Ferrándiz, J.: The impact of generic goods in the pharmaceutical industry. Health Econ. 8, 599–612 (1999)

    Article  Google Scholar 

  34. 34.

    Oberender, P.: Europe’s drug market and pharmaceutical industry in the 1990s. In: Barfield, C.E., Perlman, M. (eds.) Ch 5 in Industry Services and Agriculture: The United States Faces a United Europe. University Press of America, Lanham (1992)

    Google Scholar 

  35. 35.

    Posner, R.A.: Intellectual property: the law and economics approach. J. Econom. Perspect. 19(2), 57–73 (2005)

    Article  Google Scholar 

  36. 36.

    Ramello, G.B.: What’s in a name: trademark law and economic theory. J. Econom. Surv. 20(4), 547–565 (2006)

    Article  Google Scholar 

  37. 37.

    Regan, T.L.: Generic entry, price competition, and market segmentation in the prescription drug market. Int. J. Ind. Organ. 26(4), 930–948 (2008)

    Article  Google Scholar 

  38. 38.

    Reiffen, D., Ward, M.R.: Generic drug industry dynamics. Rev Econ Stat 87(1), 37–49 (2005)

    Article  Google Scholar 

  39. 39.

    Saha, A., Grabowski, H., Birnbaum, H., Greenberg, P., Bizan, O.: Generic competition in the US pharmaceutical industry. International Journal of Economics of Business 13(1), 15–38 (2006)

    Article  Google Scholar 

  40. 40.

    Saul, S.: Drug ads raise questions for heart pioneer. New York Times, viewed at http://www.nytimes.com, accessed 7 June 2012 (2008)

  41. 41.

    Scherer, F.M.: Industrial market structure and economic performance. Rand McNally, Chicago (1970)

    Google Scholar 

  42. 42.

    Scherer, F.M.: Post-patent barriers to entry in the pharmaceutical industry. J. Health Econ. 4, 83–87 (1985)

    PubMed  Article  CAS  Google Scholar 

  43. 43.

    Scherer, F.M.: Pricing, profits and technological progress in the pharmaceutical industry. J. Econom. Perspect. 7, 97–115 (1993)

    Article  Google Scholar 

  44. 44.

    Scherer, F.M., Ross, D.: Industrial market structure and economic performance, 3rd edn. Houghton Mifflin, Boston (1990)

    Google Scholar 

  45. 45.

    Schmalensee, R.: Entry deterrence in the ready-to-eat breakfast cereal market. Bell Journal of Economics 9(2), 305–327 (1978)

    Article  Google Scholar 

  46. 46.

    Schmalensee, R.: Product differentiation advantages of pioneering brands. American Economic Review 72, 349–365 (1982)

    Google Scholar 

  47. 47.

    Scott Morton, F.M.: Barriers to entry, brand advertising, and generic entry in the U.S. pharmaceutical industry. Int. J. Ind. Organ. 18(7), 1085–1104 (2000)

    Article  Google Scholar 

  48. 48.

    Scott Morton, F.M.: Horizontal integration between brand and generic firms in the pharmaceutical industry. J. Econom. Manage. Strat. 11(1), 135–168 (2002)

    Article  Google Scholar 

  49. 49.

    Steele, H.: Monopoly and competition in the ethical drugs market. J. Law Econ. 5, 131–164 (1962)

    Article  Google Scholar 

  50. 50.

    US Congressional Budget Office (CBO).: How increased competition from generic drugs has affected prices and returns in the pharmaceutical industry, July, Washington, DC (1998)

  51. 51.

    US Congress Senate Kefauver Hearings.: Refers to United States Congress, Senate Committee on the Judiciary, Subcommittee on Antitrust and Monopoly (Chairman Senate E. Kefauver: Administered Prices in the Drug Industry, Parts 14–26, Washington, DC: USGPO (1959–1960)

  52. 52.

    Walker, H.D.: Market power and price levels in the ethical drug industry. Indiana University Press, Bloomington (1971)

    Google Scholar 

  53. 53.

    World Health Organization: Expert Committee on the Unification of Pharmacopeias, Report on the Sixth Session, Technical Report Series No. 29, Geneva: WHO (1950)

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Roger Feldman.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Feldman, R., Lobo, F. Competition in prescription drug markets: the roles of trademarks, advertising, and generic names. Eur J Health Econ 14, 667–675 (2013). https://doi.org/10.1007/s10198-012-0414-7

Download citation

Keywords

  • Prescription drug markets
  • Trademarks
  • Advertising
  • Generic names

JEL Classification

  • I18
  • I11
  • H41