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?
What will be an ideal response
Answer: During the first few months of the entry of the generic drug producers, the profits will decline. This is because, the industry which was earlier a monopoly with barriers to entry of other firms and no close substitutes, is changed into a monopolistic industry with product having close substitutes and less restricted entry of other firms.
The profits in monopolistic competition are not as large as in monopoly.Thus, due to rise in competition the profits will decline.
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