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Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration

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Glenn Ellison
Sara Fisher Ellison

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Abstract

This paper develops a new approach to testing for strategic entry deterrence and applies it to the behavior of pharmaceutical incumbents just before they lose patent protection. The approach involves looking at a cross-section of markets and examining whether behavior is nonmonotonic in the size of the market. Under certain conditions, investment levels will be monotone in market size if firms are not influenced by a desire to deter entry. Strategic investments, however, may be nonmonotone because entry deterrence is unnecessary in very small markets and impossible in very large ones, resulting in overall nonmonotonic investment. The pharmaceutical data contain advertising, product proliferation, and pricing information for a sample of drugs which lost patent protection between 1986 and 1992. Among the findings consistent with an entry deterrence motivation are that incumbents in markets of intermediate size have lower levels of advertising and are more likely to reduce advertising immediately prior to patent expiration.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13069.

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Date of creation: Apr 2007
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Handle: RePEc:nbr:nberwo:13069

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Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology

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References listed on IDEAS
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Full references

Cited by:
(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. Robert Seamans, 2008. "Pricing and Multi-Market Contact in the Cable TV Industry," Working Papers 08-13, NET Institute, revised Oct 2008. [Downloadable!]
  2. Loreto Lira & Rosario Rivero & Rodrigo Vergara, 2005. "Entry and Prices: Evidence from the Chilean Supermarket Industry," Documentos de Trabajo 299, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  3. Alka Chadha & Åke Blomqvist, 2005. "Patent Races, “Me-Too” Drugs, and Generics: A Developing-World Perspective," Departmental Working Papers wp0513, National University of Singapore, Department of Economics. [Downloadable!]
  4. Leemore S. Dafny, 2003. "Entry Deterrence in Hospital Procedure Markets: A Simple Model of Learning-By-Doing," NBER Working Papers 9871, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Sara Fisher Ellison & Catherine Wolfram, 2001. "Pharmaceutical Prices and Political Activity," NBER Working Papers 8482, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Heger, Diana & Kraft, Kornelius, 2008. "Barriers to Entry and Profitability," ZEW Discussion Papers 08-071, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  7. Sara Fisher Ellison & Catherine Wolfram, 2004. "Coordinating on Lower Prices: Pharmaceutical Pricing Under Political Pressure," Economics Working Papers 0048, Institute for Advanced Study, School of Social Science. [Downloadable!]
  8. Murat F. Iyigun & X. Maggie Chen, 2004. "Strategic R&D Delays Generate Market Power," Econometric Society 2004 North American Summer Meetings 213, Econometric Society. [Downloadable!]
  9. Kurt R. Brekke & Odd Rune Straume, 2008. "Pharmaceutical Patents: Incentives for R&D or Marketing?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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