Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
The Economics of Generic Drug Shortages: The Limits of Competition
Journal of Economic Perspectives
vol. 39,
no. 2, Spring 2025
(pp. 79–102)
(Complimentary)
Abstract
We examine the economics of the US generic prescription drug market, which comprises the majority of medicines sold. The market is celebrated for its benefits in the form of high quality and low prices for consumers but is also increasingly challenged by shortages that may disrupt patient care. Shortages in the generic drug market present an economic puzzle—in the face of a shortage, prices should rise, encouraging entry, yet we observe shortages increasing in number and persistence. Moreover, if shortages cause patient harm, why don't markets pay a premium for a reliable supply chain? We argue that the puzzle can be explained by the inability of generic drug prices to adjust easily due to regulatory and contracting frictions, and the coexisting presence of asymmetric information and agency problems in the US market. We conclude with a discussion of policy interventions aimed at addressing these challenges to ensure resilient US generic drug supply.Citation
Conti, Rena M., and Marta E. WosiÅ„ska. 2025. "The Economics of Generic Drug Shortages: The Limits of Competition." Journal of Economic Perspectives 39 (2): 79–102. DOI: 10.1257/jep.20241420Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- I11 Analysis of Health Care Markets
- L13 Oligopoly and Other Imperfect Markets
- L14 Transactional Relationships; Contracts and Reputation; Networks
- L51 Economics of Regulation
- L65 Chemicals; Plastics; Rubber; Drugs; Biotechnology