Regulation and welfare: evidence from paragraph IV generic entry in the pharmaceutical industry

This article estimates welfare effects of accelerated generic entry via Paragraph IV challenges. Using data from 2000–2008 for hypertension drugs in the United States, we estimate demand using a random‐coefficients logit model. We find consumers gain $42 billion whereas producers lose $32.5 billion from entry. This modest $9.5 billion gain in social welfare is consistent with our observation that overall consumption does not increase after entry—generic sales displace branded sales, shifting surplus downstream from producers to consumers, insurance companies, and retailers. We demonstrate significant cross‐molecular substitution and discuss challenges in determining what fraction of downstream surplus actually goes to consumers.