Thanks, Tinker. The math and the graphs are way over my head, but I think I can grasp the gist of the analysis. My take on all of this is that the situation is so incredibly complex that we can't make accurate predictions at the moment. We need to see (1) How SNY will ultimately respond to the generic challenge (2) How the various levels of customers will respond to the generic challenge and SNY's response to its customers response.
Let me suggest a couple of things to you from a more social scientist orientation rather than a strictly financial orientation. The article states at the end:
Thus, the moral of the story is not to condemn generic competition, but to elucidate switching costs in consumer behavior as a form of market failure caused by imperfect information. Switching costs are incurred when consumers are ignorant of the bioequivalency of generic substitutes. Policy makers should focus on eroding switching costs by educating consumers.
I would argue that the author is really off-base when it comes to "educating consumers." Consumer education regarding generics is NOT at all what the generic makers would want and neither would the government. "Consumer ignorance" works in the generic's favor and is NOT the cause of a "market failure," IMO. My reasoning is completely based on anecdotal evidence.
When I first came on this board, I assumed that generic drugs were identical to their brand name counterparts, except for the pricing. I'm willing to bet that 99.99% of the population thinks as I did. (Does the author of the article really understand the concept of "bioequivalency?") I know all of my friends think that--I'm especially thinking of the ones who took generic Wellbutrin XL--and we all have advanced degress. Until Dew started educating me about the FDA requirements for generic drug approval (and I started researching the Wellbutrin case) and the concept of "bioequivalency," I had no idea about the huge--at least I consider it huge--difference between a brand name drug and its FDA-approved generic "equivalent." I think--you may not agree--that if consumer education programs tried to educate the "ignorant consumer" as to the true ("real") relationsship of the brand name drug to its generic counterpart, there would be a public outcry against generics, and this outcry would find its way into the halls of Congress. (If I were working for a BP, I would launch a monstrous "consumer education" campaign to let consumers know exactly what "generic drugs" really are. I would publicize the Wellbutrin trial in every media outlet in the country, and make sure that the trial briefs are stuck under the nose of every Congressperson that my lobbyists could get to.)
The author, an undergraduate at Berkeley majoring in economics, is unbelievably naive, psychologically and politically, to assume that "consumer education" regarding generics would overcome what he considers a "market failure" to eliminate switching costs.
One other point I wish to make about this whole discussion going on. It seems to me that one might want to differentiate between SNY's short-term intersts regarding generic Lovenox and its (and BP's) long-term interests in letting generic drug makers know what they face, if they attempt to bring more complex molecules to market. (Ironically, the company that may benefit the most in the short term from this "shot-across-the-bow" of the generic drug makers is Teva, because of the potential generic challenge to Copaxone.) These longer-term interests need to be factored into any equation when trying to figure out SNY's moves in this matter. (I definitely don't agree with McBio when he says that a price war is totally out of the question. Nor do I agree with the author of the aforementioned article that the branded drug may actually increase in price in response to the generic challenge. I don't think his analogies to previous generic challenges are not applicable to the Lovenox case.)
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