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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

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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Bibliographic Info

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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Publication status: published as Ellison, Glenn and Sara Fisher Ellison. "Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration." American Economic Journal: Microeconomics 3, 1 (February 2011): 1-36.
Handle: RePEc:nbr:nberwo:13069

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