Pseudo-Generic Products and Barriers to Entry
in Pharmaceutical Markets
and JAMES R. SELDON
Department of Economics, The University College of the Cariboo, Kamloops, BC,
Canada V2C 5N3
Abstract. This paper examines incentives for brand-name pharmaceutical producers to mar-
ket pseudo-generic versions of their own branded products upon the expiry of patent pro-
tection.Using a two-stage game model, we determine that under plausible demand and cost
conditions, brand-name incumbents can ﬁnd it proﬁtable to produce pseudo-generics as a
means of blocking rivals’ entry even when independent ﬁrms producing true generics face low
entry costs.The model shows that social welfare can be higher when ﬁrms use pseudo-generics
instead of capacity for entry deterrence as long as substitutability between brand-name and
generic products is suﬃciently high.
Key words: barriers, deterrence, pharmaceuticals, pseudo-generics
JEL Classiﬁcations: I10, L12
We begin with two observations. First, pharmaceutical ﬁrms generally
appear to have maintained above-normal proﬁt levels through time (Kom-
oto, 2001; c.f. Reinhardt, 2001). Second, brand name pharmaceutical ﬁrms
often control subsidiaries whose function is to manufacture and market
generic versions of brand-name drugs (c.f. Hollis, 2002, 2003). Our interest is
in possible links between the two, and particularly in the use of the latter for
the purpose of entry deterrence.
When proﬁts remain systematically higher than the norm, barriers of some
sort must be constraining new producers from entering to take advantage of
the situation.Research into the nature of behavioural (as opposed to legal)
barriers led ﬁrst to the development of limit-pricing models, in which
incumbent ﬁrms blocked entry by overproducing and selling at prices below
Author for Correspondence: Department of Economics, The University College of Cariboo,
Kamloops, BC, Canada V2C SN3. Tel.: +1-250-828-5000; E-mail: email@example.com
Review of Industrial Organization 25: 71–86, 2004.
Ó 2004 Kluwer Academic Publishers. Printed in the Netherlands.