Pay for Delay to Prevent Market Entry of a Generic Manufacturer

The phenomenon of reverse payments, which is common in the pharmaceutical industry, is relatively unpopular in other industries because of antitrust-related legal issues in various countries. In this study, we first examine a basic model with one original and one generic manufacturer, in which the original manufacturer may propose pay for delaying (P4D) entry of the generic manufacturer. We show that the original and generic manufacturers have incentives to engage in P4D, and when doing so, consumer surplus and social welfare always decline. Next, we add another original manufacturer to the basic model. If this manufacturer is a domestic firm, P4D will increase social welfare if drugs are close to homogeneous products and the additional manufacturer is efficient. However, if this manufacturer is a foreign firm, P4D will always reduce social welfare. These results suggest the need to consider whether the drug market is internationalized when deciding whether to regulate P4D.