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Case in Point: Competition in The Market For Generic Prescription Drugs

Generic prescription drugs have become a large part of the prescription drug market since regulations made it easier for generic drug companies to enter the market in 1984. Generic drugs now make up over half of total drug sales. On average, generic drugs cost much less than their branded counterparts - $32.23 compared to $111.02 for branded drugs in 2006. As more generic manufacturers produce a given branded drug, competition drives prices down further, with prices 40-60% lower than the original branded drug depending on the number of competitors. The generic drug industry exhibits characteristics of a perfectly competitive market.

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90 views1 page

Case in Point: Competition in The Market For Generic Prescription Drugs

Generic prescription drugs have become a large part of the prescription drug market since regulations made it easier for generic drug companies to enter the market in 1984. Generic drugs now make up over half of total drug sales. On average, generic drugs cost much less than their branded counterparts - $32.23 compared to $111.02 for branded drugs in 2006. As more generic manufacturers produce a given branded drug, competition drives prices down further, with prices 40-60% lower than the original branded drug depending on the number of competitors. The generic drug industry exhibits characteristics of a perfectly competitive market.

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Abdullah Muhammad
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Case in Point: Competition in the Market for Generic Prescription Drugs1

Generic prescription drugs are essentially identical substitutes for more expensive brand-name
prescription drugs. Since the passage of the Drug Competition and Patent Term Restoration Act of 1984
(commonly referred to as the Hatch-Waxman Act) made it easier for manufacturers to enter the market
for generic drugs, the generic drug industry has taken off. Generic drugs represented 19% of the
prescription drug industry in 1984 and today represent more than half of the industry. U.S. generic sales
were $15 billion in 2002 and soared to $192 billion in 2006. In 2006, the average price of a branded
prescription was $111.02 compared to $32.23 for a generic prescription.
A Congressional Budget Office study in the late 1990s showed that entry into the generic drug industry
has been the key to this price differential. As shown in the table, when there are one to five manufacturers
selling generic copies of a given branded drug, the ratio of the generic price to the branded price is about
60%. With more than 20 competitors, the ratio falls to about 40%.
The generic drug industry is largely characterized by the attributes of a perfectly competitive market.
Competitors have good information about the product and sell identical products. The largest generic drug
manufacturer in the CBO study had a 16% share of the generic drug manufacturing industry, but most
generic manufacturers’ sales constituted only 1% to 5% of the market. The 1984 legislation eased entry
into this market. And, as the model of perfect competition predicts, entry has driven prices down,
benefiting consumers to the tune of tens of billions of dollars each year.

Table 9.1 Price Comparison of Generic and Innovator Drugs, by Number of Manufacturers

Number of Avg. Rx Price, Avg. Rx Price, Avg. Ratio of the


Number of Generic Innovator All Generic All Innovator Generic Price to the
Manufacturers of a Drugs in Drugs in Drugs in Innovator Price for
Given Innovator Drug Category Category Category Same Drug

1 to 5 34 $23.40 $37.20 0.61

6 to 10 26 $26.40 $42.60 0.61

11 to 15 29 $20.90 $50.20 0.42

16 to 20 19 $19.90 $45.00 0.46

21 to 24 4 $11.50 $33.90 0.39

Average $22.40 $43.00 0.53

1
Sources: Congressional Budget Office, “How Increased Competition from Generic Drugs Has Affected Prices and
Returns in the Pharmaceutical Industry,” July 1998. Available at www.cbo.gov; “Generic Pharmaceutical Industry
Anticipates Double-Digit Growth,” PR Newswire, March 17, 2004. Available at www.Prnewswire.com; 2008
Statistical Abstract of the United States, Table 130.

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