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

The European Journal of Health Economics volume 14, pages 667–675 (2013)Cite this article

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.

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Notes

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

  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. 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. 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. 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. 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. We use subscripts to denote partial derivatives, for example, H T = δH/δT.

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

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

  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. 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. 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.

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Authors and Affiliations

  1. University of Minnesota, Minneapolis, MN, USA

    Roger Feldman

  2. Universidad Carlos III, Madrid, Spain

    Félix Lobo

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  1. Roger Feldman
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  2. Félix Lobo
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Correspondence to Roger Feldman.

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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

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  • DOI: https://doi.org/10.1007/s10198-012-0414-7

Keywords

  • Prescription drug markets
  • Trademarks
  • Advertising
  • Generic names

JEL Classification

  • I18
  • I11
  • H41