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Inferring the Effects of Vertical Integration from Entry Games : An Analysis of the Generic Pharmaceutical Industry

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  • Kubo, Kensuke

Abstract

This paper introduces a novel method for examining the effects of vertical integration. The basic idea is to estimate the parameters of a vertical entry game. By carefully specifying firms'payoff equations and constructing appropriate tests, it is possible to use estimates on rival profiteffects to make inferences about the existence of vertical foreclosure. I estimate the vertical entry model using data from the US generic pharmaceutical industry. The estimates indicatethat vertical integration is unlikely to generate anticompetitive foreclosure effects. On the other hand, significant efficiency effects are found to arise from vertical integration. I use the parameter estimates to simulate a policy that bans vertically integrated entry. The simulation results suggest that such a ban is counterproductive; it is likely to reduce entry into smaller markets.

Suggested Citation

  • Kubo, Kensuke, 2010. "Inferring the Effects of Vertical Integration from Entry Games : An Analysis of the Generic Pharmaceutical Industry," IDE Discussion Papers 221, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    • Handle: RePEc:jet:dpaper:dpaper221
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    More about this item

    Keywords

    United States; Pharmaceutical Industry; Monopolies; Vertical Integration; Vertical Foreclosure; Entry; Generic Pharmaceuticals;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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