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CESifo Economic Studies Advance Access originally published online on August 9, 2006
CESifo Economic Studies 2006 52(3):565-586; doi:10.1093/cesifo/ifl009
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© The Author 2006. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions please e-mail: journals.permissions@oxfordjournals.org

Advertising, Generic Competition and Price Regulation in Pharmaceutical Markets

Ingrid Königbauer*

The effect of price regulation on generic market entry and welfare in the presence of (persuasive) advertising is analysed. An incumbent has the possibility to invest in advertising targeted at the physician. Advertising creates vertical product differentiation between brand-name drugs and its generic substitutes. This differentiation creates the possibility to make positive profits for both firms. The presence of price regulation, however, reduces the anticipated generic profits. If price regulation is too strict, then the generic firm will refrain from market entry. Hence, the model confirms the empirical observation that generic market shares are lower in countries with strict price regulation. (JEL: I11, L13)


* Department of Economics, University of Munich, Ludwigstr. 28 VG, 80539 Munich, Germany, e-mail: ingrid.koenigbauer{at}lrz.uni-muenchen.de.

I thank three anonymous referees for helpful comments and suggestions. This work has been carried out, while I stayed at the HEB in Bergen. I want to thank both the HEB and the Economics Department of the University of Bergen for the pleasant stay. Additionally, I thank the DAAD and Ruhrgas for the financial support.


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