The expiration of an innovator drug's patent frequently prompts more than one generic replica to enter the market. Since most generic competitors sell their copy under the same chemical name, there is little difference between their products.

Economic theory suggests that differences between products weaken the price competition. Therefore when products are roughly identical, price competition can be intense. Hence, as more generic manufacturers enter the market, they should face increased pressure to lower prices in order to maintain market share.

The average price of a generic drug declines when the number of manufacturers and distributors of that drug increases. In simple words, the average prescription price of a generic drug with five manufacturers is more than that of a drug with 25 manufacturers.

Comparing the average generic prescription price with the average innovator price for the same drug also shows prices falling as the number of generic manufacturers rises. When one to 10 generic manufacturers are in the market, the generic retail prescription price averages 61 percent of the brand-name price. When 11 to 24 generic manufacturers are in the market, the generic retail price averages less than half of the brand-name price.

Other studies have also concluded that prices of generic drugs decline in response to increased generic competition. Economist Richard Caves and colleagues found that as the number of generic manufacturers increased, the average generic price fell from 60 percent to just 34 percent of the brand-name price.

Since generic prices tend to fall when the number of producers rises. And Generic manufacturers are most profitable when they are one of the first to enter a market.