The effect of price regulation on generic market entry and welfare in the presence of (persuasive) advertising is analysed. An incumbent has the possibility to invest in advertising targeted at the physician. Advertising creates vertical product differentiation between brand-name drugs and its generic substitutes. This differentiation creates the possibility to make positive profits for both firms. The presence of price regulation, however, reduces the anticipated generic profits. If price

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... ation is too strict, then the generic firm will refrain from market entry. Hence, the model confirms the empirical observation that generic market shares are lower in countries with strict price regulation. (JEL: I11, L13)