Centre
for Development Economics
and
Department of Economics, Delhi School of Economics
ANNOUNCE
A SEMINAR
Inferring
the Effects of Vertical Integration
from Entry Games:
An Analysis of the Generic Pharmaceutical Industry
by
Kensuke Kubo
Honorary
Visiting Scientist
Indian Statistical Institute, New Delhi
On Thursday, October 20, 2011 at 3:00 p.m.
Venue : AMEX Conference Room (Second Floor)
Department of Economics, Delhi School of Economics
All are cordially invited
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. The econometric model is used to measure vertical rival effects and to make inferences about the effect of vertical integration on market outcomes and market structure formation. Application of the model to the US generic pharmaceutical industry, which consists of vertical oligopolistic markets that open up sequentially, yields the following result: vertical integration has significant efficiency effects that spill over to unintegrated downstream firms. This implies that vertical integration is procompetitive from a static point of view. The parameter estimates are used to simulate the impact of a hypothetical policy that bans vertically integrated entry. The simulation result indicates that such a ban reduces the equilibrium number of downstream entrants. In other words, allowing vertically integrated entry results in a greater number of downstream entrants. Combined with the finding that vertical integration has strong efficiency effects, this suggests that the dynamic effects of vertical integration are also likely to be precompetitive for the generic drug industry.