Credible Threat. To better understand the amount of payments in P4D deals and when these will lead to later generic challengers staying out of the market, Figure 1 plots the equilibrium profits for the branded firm as a function of first mover advantage (κ) for different market struc- tures. Specifically, the figure shows the profits of the branded firm under (i) a monopoly, (ii) a T0 competitive triopoly (with no AGs), (iii) a T1 tripoloy when the first generic is an AG and the brand earns a licensing fee L, and (iv) a D0 competitive duopoly.
Credible Threat. As can be seen from the first panel, as well as from the third panel for a higher value of λ, the most desirable position from the perspective of the branded firm is the monopoly profit, and the least desirable is the competitive triopoly profit, neither of which depend 0 in κ over the entire range while V˜T 1, which is inclusive of the licensing fee, starts below V˜D0, but on κ (see the figures above). More generally when δ 0, note that V˜D0 = ΠD0 + δΠT0 is decreasing 0 0 ˜ 0 0 eventually is greater than V D0 (these are marked “D0 Competitive Duopoly” and “T1 Triopoly (G1 is AG)” in the graphs for the branded firm above). We label the intersection point of these two curves as the credible threat point κ∗, such that for all κ ≥ κ∗, the branded firm’s profits are higher in a triopoly with an authorized generic than in a competitive duopoly, i.e., V˜T 1(κ) ≥ V˜D0(κ). Similarly, if the branded firm can launch its own generic (at some cost θ) then it can earn two profits from the sales of the branded and the generic drug and the sum of these profits is also increasing in κ. This is because the profits of the first generic in a triopoly increase in κ (see bottom left panel in Figure 3). In fact, for θ = 0, it crosses the D0 Competitive Duopoly line at exactly the same point (see the curve marked “T1 Triopoly (G1 is self-AG)”) and hence if κ ≥ κ∗, the branded firm’s profit in a T1 triopoly with a self launched generic is greater than its profit in a competitive duopoly.17 However, for positive values of θ this last curve shifts to the right (not shown) and for large enough values of θ the threat by a branded firm to launch its own generic may not be credible. Further, to launch own generic after loosing the case requires that cost θ be lower than some threshold value (θ ≤ θ∗∗) and that κ ≥ κ∗. Note that the general shapes of these curves do not change much due to the selected parameter values. For instance, if λ is increased from 1 to 3, (see third panel above), it increases the market share of generics relative to the brand and consequently moves the credible threat point to the left. We provide below the condition under which a threat point κ∗ exists for launching an external AG, as well as the threshold value of θ above which the branded firm cannot launch its own generic.
Credible Threat. The most desirable position from the perspective of the branded firm is the mo- nopoly profit and least desirable is the competitive triopoly profit, neither of which depend on κ. More important is to note that V (D0)(κ) is decreasing in κ over the entire range while V˜(T 1)(κ) starts below V (D0)(κ) but eventually is greater than V (D0)(κ). We label the intersection point of
