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Job Market Paper

Market Exclusivity, Entry, and Consumer Welfare: The Case of Rx-to-OTC Switch in the Anti-ulcer Drug Market

Abstract: Over-the-counter (OTC) versions of prescription drugs can improve access and affordability. To incentivize firms to convert prescription (Rx) drugs to OTC status, the first firm to gain approval for OTC sales of a prescription (Rx) drug enjoys three years of market exclusivity granted by the Food and Drug Administration (FDA). Firms usually, but not always, delay OTC entry until the end of their Rx patent protection. This paper studies how the FDA provision of market exclusivity affects time of firm entry into the OTC market and, ultimately, consumer welfare. To separate the multiple offsetting incentives in this market, I perform a structural analysis of anti-ulcer drugs, where many, but not all, molecules have been converted at varying points in their lifecycle. The model recognizes imperfect substitution between Rx and OTC drugs and allows an endogenous pricing equilibrium and dynamic OTC entry decisions. I find that OTC market exclusivity policy, which is intended to increase the number of OTC drugs, actually hurts consumers by delaying OTC entry until an Rx drug patent expires. For example, without the market exclusivity policy AstraZeneca would have introduced Nexium OTC in 2011 instead of at patent expiry in 2014. I propose an alternative policy in which market exclusivity is preserved after patent expiration to an OTC drug that is introduced more than three years earlier than patent expiration, and find that the policy eliminates the incentive of strategic delay, and enhances consumer welfare.

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