The Effect of Market Exit: An Exploration of Recalls and Import Bans in the Generic Pharmaceutical Industry

This paper examines the effect of six substantial exit events on prices in the U.S. generic pharmaceutical industry. Between 2005 and 2009, the FDA found manufacturing violations with six firms producing generic pharmaceuticals that resulted in these firms withdrawing a large number of products from the market. We exploit the shocks caused by these abrupt exits to estimate how prices changed under a variety of market conditions. We find that a surviving firm is expected to raise substantially prices when it is a new monopolist but less substantially as a new duopolist. Price increases are observed for markets with up to five competitors, although these results are statistically insignificant. A sizable proportion of these price increases can be attributed to a high market share for the exiting firm or to a high pre-exit concentration among the remaining firms. Finally, we provide evidence that the price effect persists for at least several years in a new monopoly, while the effect for a market with three competitors peaks after about two years then dissipates.