High brand drug prices in presence of generic drugs

This thesis examined why brand drug firms charge high prices compared to their generic competitors. This thesis also looked at the possibility to deter generic entry. Using Stackelberg-Bertrand competition model with vertical differentiation, it becomes clear that it is not profitable for the brand firm to deter entry. This thesis shows that it is optimal for the brand firm to compete with generic firms in the pharmaceutical market. However, they compete for different types of consumers. Some consumers are more risk-averse than others. This gives the brand firm market power since he is the only supplier for the more risk-averse consumers. The generic firms compete with each other for the less risk-averse consumers. The brand drug firm act as a Stackelberg leader and uses the reaction function of the generic firm to determine his optimal, and higher, drug price.