Entry and price response in markets without patent protection: The case of pharmaceuticals in Argentina

Recent literature on U.S. pharmaceutical markets shows that following patent expiration leaders raise their prices in response to generic entry. This price increase occurs due to two different patterns in consumer behavior: one group of consumers substitutes the brand product for cheaper ones, while a second group remains loyal to the original brand, which leader firms continue to supply. On average, prices fall with generic entry. This market structure resembles a leader-follower model, where followers take leader prices to decide their own, and the leader strategically incorporates followers’ behavior in its decision. The goal of this paper is to test this premise in the Argentinean pharmaceutical markets, where patent protection does not apply, allowing immediate entry. From the group of 88 therapeutic classes selected, 56 classes kept the same leader during the period 1988-1995, although just in nine of those cases the first entrant remains as market leader. The cases where market leader remains the same during the sample period but they were not necessarily the first entrants are defined as loose leadership markets, while cases of strict leadership are those where first entrants remained as market leaders during the sample period. In both cases, the leader-follower hypothesis is checked and supported by the data, mirroring the results obtained under a patent regime. In addition, the lack of patents also raises the question of difference in behavior among followers. Therefore, two differentiated groups of followers are studied separating the main three from the rest of the market competitors.