The Long Shadow of Patent Expiration

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Abstract
This chapter investigates the interactions of prescription versus over-the-counter (OTC) versions of the same pharmaceutical compound during the period around the patent expiration for the compound. It is hypothesized that generic manufacturers will have marketing-sales ratios close to zero, where marketing efforts consist of physician detailing and medical journal advertising. Neither Tagamet Rx nor Zantac Rx adopted a policy of competing with generics on price following patent expiration, and instead they increased prices. Although on a relative basis, the OTC introductions seem to have benefited Tagamet more than Zantac, on an absolute revenue basis over both OTC and Rx forms, Zantac gained more. Use of econometric methods in constructing price indexes that integrate the impacts of new goods needs more experimentation, perhaps with other data sets and families of products, and with specifications that include nonprice factors influencing demand functions.

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