Generic Drug Shortages and Undifferentiated Competition

Shortage of affordable and quality drugs has been a global problem. The extant literature indicates several root causes, including commoditized generics, lack of economic supplier incentives, supply chain and inventory glitches, and government regulations. Most studies point to regulatory policy changes to lower generic’s entry barrier, promote more competition, and increase manufacturing capacity. In this paper, we focus on the first two factors and build a simple game theoretic model to explain the inevitability of drug shortage under the current market structure, even with increased capacity. Our results show that policy changes to (1) allow product differentiation among generics (quality or feature), (2) improve the public’s perception of generics’ quality, and (3) lower the cost of major ingredients will mitigate drug shortages.