Advertising and generic market entry

The effect of purely persuasive advertising on generic market entry and social welfare is analysed. An incumbent has the possibility to invest in advertising which affects the prescribing physician's perceived relative qualities of the brand-name and the generic version of the drug. Advertising creates product differentiation and can induce generic market entry which is deterred without differentiation due to strong Bertrand competition. However, over-investment in advertising can deter generic market entry under certain conditions and reduces welfare as compared to accommodated market entry.