An Economic Approach
Edited by Jaume Puig-Junoy
Chapter 4: Regulation and competition in pharmaceutical markets
J.R. Borrell Arqué, A. Costas Comesaña and R. Nonell Torres INTRODUCTION The objective of this chapter is to analyse the extent to which pharmaceuticals withstand competition from therapeutic substitutes and generics in the UK and Spain. Our hypothesis is that substitute drugs compete in markets, but that the type of competition they face depends on the specific regulations in force in each of the countries studied with regard to entry, price and prescription. In this chapter we assume that pharmaceuticals are strongly differentiated products that compete in a space with multidimensional characteristics, one of them being price. According to Danzon,1 ‘aggressive competitive entry of differentiated therapeutic substitutes implies that the industry is best characterized as monopolistically competitive, with possible pockets of oligopoly early in the life of a new therapeutic class’. Danzon1 also states that research and development (R&D) costs are fixed and common costs in the activity of offering pharmaceuticals to any number of consumers anywhere in the world. Patents force competitors to bear the costs of research, development and the authorization of new products before a generic substitute is launched onto the market. When patents expire generic competitors can enter the market, bearing only the authorization costs incurred by demonstrating the substitute’s bioequivalence to the innovative product, which is already on the market. This chapter provides evidence on competition between rival drugs in the UK and Spain, and shows the number of pharmaceuticals on the market, the position of dominance occupied by products in relation...
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