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The Roles of Marketing, Product Quality, and Price Competition in the Growth and Composition of the U.S. Antiulcer Drug Industry

In: The Economics of New Goods

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Author Info

  • Ernst R. Berndt
  • Linda T. Bui
  • David H. Lucking-Reiley
  • Glen L. Urban

Abstract

The introduction of Tagamet in the United States in 1977 represented both a revolution in ulcer therapy and the beginning of an important new industry. Today there are four prescription H2- antagonist drugs: Tagamet, Zantac, Pepcid and Axid, and they comprise a multi-billion dollar market for the treatment of ulcers and other gastric acid conditions. In this paper, we examine the determinants of sales in this market, using a carefully constructed data set made possible by IMS America. We concentrate particularly on the marketing of these drugs to physicians through detailing and medical journal advertising, and we make an innovative attempt to distinguish between 'industry-expanding' and 'rivalrous' marketing efforts. We find that the impact of total marketing on the expansion of overall industry sales declines as the number of products on the market increases. In addition, we find that the stock of industry-expanding marketing depreciates at a near-zero rate, while the stock of marketing oriented towards rivalrous market share competition depreciates at a 40% annual rate. We also find that the products' sales are affected significantly by price, quality attributes (such as number of FDA- approved indications and number of adverse drug interactions), and order of entry into the market.

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This chapter was published in:

  • Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1, May.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6070.

    Handle: RePEc:nbr:nberch:6070

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    1. Berndt, Ernst R & Wood, David O, 1979. "Engineering and Econometric Interpretations of Energy-Capital Complementarity," American Economic Review, American Economic Association, vol. 69(3), pages 342-54, June.
    2. Zvi Griliches & Frank R. Lichtenberg, 1984. "R&D and Productivity Growth at the Industry Level: Is There Still a Relationship?," NBER Chapters, in: R & D, Patents, and Productivity, pages 465-502 National Bureau of Economic Research, Inc.
    3. Diewert, Erwin, 2007. "Index Numbers," Economics working papers diewert-07-01-03-08-17-23, Vancouver School of Economics, revised 31 Jan 2007.
    4. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    5. Cocks, Douglas L & Virts, John R, 1974. "Pricing Behavior of the Ethical Pharmaceutical Industry," The Journal of Business, University of Chicago Press, vol. 47(3), pages 349-62, July.
    6. Leffler, Keith B, 1981. "Persuasion or Information? The Economics of Prescription Drug Advertising," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 45-74, April.
    7. Bresnahan, Timothy F & Reiss, Peter C, 1990. "Entry in Monopoly Markets," Review of Economic Studies, Wiley Blackwell, vol. 57(4), pages 531-53, October.
    8. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-65, June.
    9. Reekie, W Duncan, 1978. "Price and Quality Competition in the United States Drug Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 26(3), pages 223-37, March.
    10. David B. Montgomery & Alvin J. Silk, 1972. "Estimating Dynamic Effects of Market Communications Expenditures," Management Science, INFORMS, vol. 18(10), pages B485-B501, June.
    11. Glen L. Urban & Theresa Carter & Steven Gaskin & Zofia Mucha, 1986. "Market Share Rewards to Pioneering Brands: An Empirical Analysis and Strategic Implications," Management Science, INFORMS, vol. 32(6), pages 645-659, June.
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    Cited by:
    1. Abbott, Thomas III, 1995. "Price regulation in the pharmaceutical industry: Prescription or placebo?," Journal of Health Economics, Elsevier, vol. 14(5), pages 551-565, December.
    2. Jonathan Skinner & Douglas Staiger, 2007. "Technology Adoption from Hybrid Corn to Beta-Blockers," NBER Chapters, in: Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches, pages 545-570 National Bureau of Economic Research, Inc.
    3. Amitabh Chandra & David Malenka & Jonathan Skinner, 2013. "The Diffusion of New Medical Technology: The Case of Drug-Eluting Stents," NBER Chapters, in: Discoveries in the Economics of Aging, pages 389-403 National Bureau of Economic Research, Inc.
    4. Ching, Andrew & Ishihara, Masakazu, 2007. "The Effects of Detailing on Prescribing Decisions under Two-Sided Learning," MPRA Paper 4935, University Library of Munich, Germany.
    5. Marco Ottaviani, . "Monopoly Pricing with Social Learning," ELSE working papers 035, ESRC Centre on Economics Learning and Social Evolution.
    6. Sara Fisher Ellison & Catherine Wolfram, 2001. "Pharmaceutical Prices and Political Activity," NBER Working Papers 8482, National Bureau of Economic Research, Inc.
    7. Berndt, Ernst R. & Pindyck, Robert S. & Azoulay, Pierre, 1970-, 1998. "Network effects and diffusion in pharmaceutical markets : antiulcer drugs," Working papers WP 4059-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    8. Iain M. Cockburn & Aslam H. Anis, 1998. "Hedonic Analysis of Arthritis Drugs," NBER Working Papers 6574, National Bureau of Economic Research, Inc.
    9. Ching, Andrew, 2008. "Consumer Learning and Heterogeneity: Dynamics of Demand for Prescription Drugs after Patent Expiration," MPRA Paper 7265, University Library of Munich, Germany.
    10. Andrew Ching, 2000. "Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration," Econometric Society World Congress 2000 Contributed Papers 1242, Econometric Society.
    11. Venkataraman, S. & Stremersch, S., 2007. "The Debate on Influencing Doctors’ Decisions: Are Drug Characteristics the Missing Link?," ERIM Report Series Research in Management ERS-2007-056-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.

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