Brand Loyalty and Generic Entry: Why do Brand-Name Drug Companies Launch Their Own Generics?

Facing generic competition, brand-name drug companies sometimes launch their own generics called “authorised generics” (AGs) through a third-party entity. If that strategy works, an AG should be launched for every branded drug that comes off patent. This, however, contradicts the fact that only a small proportion of branded drugs have had AGs. To explain this puzzle, I develop a two-period model in which a brand-name drug company exploits its name brand before generic entry. The model predicts that the brand-name company launches an AG only when brand loyalty is sufficiently weak.