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  5. Does Entry Remedy Collusion? Evidence from the Generic Prescription Drug Cartel

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Does Entry Remedy Collusion? Evidence from the Generic Prescription Drug Cartel

  • Amanda Starc
  • Thomas G. Wollmann
American Economic Review (Forthcoming)

Abstract

Entry represents a fundamental threat to cartels. We study the extent and effect of this behavior in the largest price fixing case in US history, which involves generic drug manufacturing. We link information on the cartel’s internal operations to regulatory filings and market data. There is a substantial increase in entry after cartel formation, but regulatory approvals delay most entrants by 2-4 years. Then, we estimate a structural model and simulate counterfactual equilibria. Absent entry, cartel profits would be dramatically higher. Correspondingly, reducing regulatory delays by just 1-2 years equates to consumer compensating variation of $612 million-$1.5 billion.

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