A closer look at the generic competition paradox : an analysis of brand name price behavior with respect to price insensitive market share and substitutability

Patients would normally be expected to view a brand and generic drug pair, once certified as being chemically identical, as perfect substitutes. Thus, the expected outcome is for the two compounds to sell for a similar and competitive price, which is lower than the monopolistic price set during the patent period. However, the brand name price has been seen to increase in response to generic entry on many occasions. This phenomenon is entitled the “Generic Competition Paradox,” and has been documented before. A previously published paper, written by Ying Kong in 2009, models the causes of the Generic Competition Paradox. Kong asserts the paradox occurs as a function of the brand name’s price insensitive market share and its substitutability with the generic compound. This study examines the relationship of Kong’s conclusions with Medicaid’s preferred drug status and the FDA’s adverse reactions data. I used regression analysis on individual transaction data from statewide Medicaid patients to determine if the paradox occurred with nine brand name and generic pairs. I then compared the results with the expectations arising from Kong’s model. The regressions demonstrate a limited relationship, but reveal that generic companies typically compete on price effectively while the brand name counterparts exhibit the paradox frequently and often independent of New York Medicaid’s preferred drug status