DP14035 Market definition in the pharmaceutical industry: a case of drugs hopping antitrust markets?

Author(s): Micael Castanheira, Carmine Ornaghi, Georges Siotis
Publication Date: October 2019
Keyword(s): Antitrust, competition policy, Market Definition, Pharmaceutical industry
JEL(s): D22, I11, L22
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14035

Delineating the boundaries of the relevant market plays a central role in the conduct of competition policy. In this paper, we focus on market definition in the pharmaceutical industry, where the introduction of generics represents a significant competitive shock for the molecule experiencing Loss of Exclusivity. We show that generic entry generates market-wide effects that shift the boundaries of the relevant antitrust market, but in unexpected ways. In a market where non-price competition is prevalent, entry may lead to a split of the (initial) relevant market. Hence, and paradoxically, entry may soften competitive constraints. We also highlight the importance of properly accounting for non-price instruments: ignoring them can easily lead to a flawed definition of the relevant antitrust market. We obtain these results by econometrically estimating time-varying substitution patterns in the pharmaceutical industry.