Generic Drug Industry Dynamics When a brand name drug's patent protection expires, many generic producers are usually ready to enter the market. These firms' products are close substitutes, they have similar production technologies, the regulatory

hurdles to enter are not so great, and, within a few months, there are plenty of rivals. What would you predict for the profitability during these first few months after generic drug entry?

These conditions describe an industry that will become close to the ideal of perfect competition. The initial generic drug entrant will be able to set prices well above marginal cost until a second entrant emerges and thus earn substantial profits. As more competitors enter, the prices they can charge fall until, with enough entry, prices are close to marginal costs and little, if any, profits are earned.