Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act

Abstract

IN 1984, Congress enacted a new law that greatly affected the economics\nof the pharmaceutical industry in the United States. It has been characterized\nas the most important legislation affecting competition in the pharmaceutical\nindustry since the 1962 Kefauver-Harris Amendments to the\nFood and Drug Act. This 1984 law, known as the Drug Price Competition\nand Patent Term Restoration Act (hereinafter the 1984 Act), facilitated\nthe entry of generic drug products after patent expiration while it also\nrestored part of the patent life lost during the premarket regulatory process\nfor new introductions.1\nMarket entry by generics was relatively limited prior to 1984 because\nof costly Food and Drug Administration (FDA) requirements that had to\nbe met by the imitative products. That is, generic drugs often would have\nto duplicate many of the pioneer's tests to gain market approval after\npatent expiration. As a result of the 1984 law, generic products need only\ndemonstrate bioequivalence to the pioneer's brand, and generic entry has\nincreased significantly. This has provided a body of very interesting data\nto analyze the pattern of entry and the pricing strategies followed by the\nentrants and incumbents.\nIn this article, we make use of data covering the sales and prices of\nthe pioneer and generic products for eighteen drug products, generally\nover the time period 1984-88.