Generics Demand and Sequential Price Competition with Brand Name Drugs: Where is the Paradox?

To explain heterogeneous diffusion of generics in OECD countries, we have analyzed genericsdemand as affected by information disparities and quality misperception. A sequential pricecompetition model, with perceived vertical differentiation, allows to re-consider the GenericsCompetition Paradox (GCP). In equilibrium the brand price is persistently higher than thegenerics one, but reduces with the number of generics entrants, showing there is no GCP astraditionally stated and that price competition is not confined to generics. A GCP rather arisesfrom the difference between the price of the brand name drug after patent expiry and before,when the brand producer is a monopolist, as claimed by Kong (2009). Within our model we canconsider dynamic efficiency issues as well, by checking if either a second mover advantage or afirst mover advantage arises from the difference between brand profits and generics profitsas a whole.