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Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs

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Author Info
Ernst R. Berndt () (Massachusetts Institute of Technology, Cambridge, MA, USA.)
Robert S. Pindyck
Pierre Azoulay

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Abstract

We examine the role of consumption externalities in the demand for pharmaceuticals at both the brand level and over a therapeutic class of drugs. Externalities emerge when use of a drug by others affects its value, and/or conveys information about efficacy and safety to patients and physicians. This can affect the rate of market diffusion for a new entrant, and can lead to dominance of one drug despite the availability of close substitutes. We use data for H2-antagonist antiulcer drugs to estimate a dynamic demand model and quantify these effects. The model has three components: an hedonic price equation that measures how the aggregate usage of a drug, as well as conventional attributes, affect brand valuation; equations relating equilibrium market shares to quality-adjusted prices and marketing levels; and diffusion equations describing the dynamic adjustment process. We find that consumption externalities influence both valuations and rates of diffusion, and that they operate at the brand and not the therapeutic class level. Copyright Blackwell Publishing Ltd. 2003.

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Article provided by Blackwell Publishing in its journal The Journal of Industrial Economics.

Volume (Year): 51 (2003)
Issue (Month): 2 (06)
Pages: 243-270
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Handle: RePEc:bla:jindec:v:51:y:2003:i:2:p:243-270

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Thompson & Steve Thompson, 2006. "Pricing in a market without apparent horizontal differentiation: Evidence from web hosting services," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 15(7), pages 649-663, October. [Downloadable!] (restricted)
  2. Dag Dalen & Steinar Strøm & Tonje Haabeth, 2006. "Price regulation and generic competition in the pharmaceutical market," The European Journal of Health Economics, Springer, vol. 7(3), pages 204-211, September. [Downloadable!] (restricted)
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  3. Peter J. Klenow, 2003. "Measuring consumption growth: the impact of new and better products," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 10-23. [Downloadable!]
  4. Richard G. Frank & Ernst R. Berndt & Alisa B. Busch, 2003. "Quality-Constant Price Indexes for the Ongoing Treatment of Schizophrenia: An Exploratory Study," NBER Working Papers 10022, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Ching, Andrew & Ishihara, Masakazu, 2007. "The Effects of Detailing on Prescribing Decisions under Quality Uncertainty," MPRA Paper 4935, University Library of Munich, Germany, revised 17 Apr 2008. [Downloadable!]
  6. Jaison R. Abel & Ernst R. Berndt & Alan G. White, 2003. "Price Indexes for Microsoft's Personal Computer Software Products," NBER Working Papers 9966, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Sorisio, Enrico & Strøm, Steinar, 2006. "Innovation and market dynamics in the EPO market," Memorandum 12/2006, Oslo University, Department of Economics. [Downloadable!]
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  8. Ernst R. Berndt & Patricia M. Danzon & Gregory B. Kruse, 2007. "Dynamic competition in pharmaceuticals: cross-national evidence from new drug diffusion," Health Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 231-250. [Downloadable!]
    Other versions:
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