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Network Effects and Diffusion in Pharmaceutical Markets: Antiulcer Drugs

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  • Ernst R. Berndt
  • Robert S. Pindyck
  • Pierre Azoulay

Abstract

We examine the role of network effects in the demand for pharmaceuticals at both the brand level and for a therapeutic class of drugs. These effects emerge when use of a drug by others conveys information about its efficacy and safety to patients and physicians. This can lead to herd behavior where a particular drug -- not necessarily the most efficacious or safest -- can come to dominate the market despite the availability of close substitutes, and can also affect the rate of market diffusion. Using data for H2-antagonist antiulcer drugs, we examine two aspects of these effects. First, we use hedonic price procedures to estimate how the aggregate usage of a drug affects brand valuation. Second, we estimate discrete-time diffusion models at both the industry and brand levels to measure the impact on rates of diffusion and market saturation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7024.

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Date of creation: Mar 1999
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Handle: RePEc:nbr:nberwo:7024

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  1. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  2. Berndt, Ernst R, et al, 1995. "Information, Marketing, and Pricing in the U.S. Antiulcer Drug Market," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 100-105, May.
  3. Iain M. Cockburn & Aslam H. Anis, 1998. "Hedonic Analysis of Arthritis Drugs," NBER Working Papers 6574, National Bureau of Economic Research, Inc.
  4. Zvi Griliches, 1958. "Research Costs and Social Returns: Hybrid Corn and Related Innovations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 419.
  5. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, INFORMS, vol. 42(12), pages 1627-1647, December.
  6. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 436, C.E.P.R. Discussion Papers.
  7. Zvi Griliches, 1990. "Patent Statistics as Economic Indicators: A Survey," NBER Working Papers 3301, National Bureau of Economic Research, Inc.
  8. Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(2), pages 117-131, Spring.
  9. Sara Ellison Fisher & Iain Cockburn & Zvi Griliches & Jerry Hausman, 1997. "Characteristics of Demand for Pharmaceutical Products: An Examination of Four Cephalosporins," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 426-446, Autumn.
  10. Neil Gandal, 1994. "Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 160-170, Spring.
  11. Choi, J.P., 1994. "Herd behavior, the "Penguin effect", and the suppression of informational diffusion: An analysis of informational externalities and payoff interdependency," Discussion Paper, Tilburg University, Center for Economic Research 1994-62, Tilburg University, Center for Economic Research.
  12. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  13. Ernst R. Berndt & Linda T. Bui & David H. Lucking-Reiley & Glen L. Urban, 1996. "The Roles of Marketing, Product Quality, and Price Competition in the Growth and Composition of the U.S. Antiulcer Drug Industry," NBER Chapters, in: The Economics of New Goods, pages 277-328 National Bureau of Economic Research, Inc.
  14. Daniel P. Kessler & Mark McClellan, 1996. "Do Doctors Practice Defensive Medicine?," NBER Working Papers 5466, National Bureau of Economic Research, Inc.
  15. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
  16. Kessler, Daniel & McClellan, Mark, 1996. "Do Doctors Practice Defensive Medicine?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(2), pages 353-90, May.
  17. repec:fth:harver:1473 is not listed on IDEAS
  18. Goolsbee, Austan & Klenow, Peter J, 2002. "Evidence on Learning and Network Externalities in the Diffusion of Home Computers," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 45(2), pages 317-43, October.
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Cited by:
  1. Jonathan Skinner & Douglas Staiger, 2005. "Technology Adoption From Hybrid Corn to Beta Blockers," NBER Working Papers 11251, National Bureau of Economic Research, Inc.
  2. Zhao, Jinhua, 2005. "The Role of Information in Technology Adoption under Poverty," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) RP2005/41, World Institute for Development Economic Research (UNU-WIDER).
  3. Antonio Cabrales & Sergi Jiménez‐Martín, 2013. "The Determinants Of Pricing In Pharmaceuticals: Are Us Prices Really So High?," Health Economics, John Wiley & Sons, Ltd., vol. 22(11), pages 1377-1397, November.
  4. Andersson, Kjetil & Foros, Øystein & Steen, Frode, 2006. "Text and Voice: Complements, Substitutes or Both?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5780, C.E.P.R. Discussion Papers.
  5. Javier Coronado & Sergi Jiménez-Martín & Pedro Marín, 2014. "An empirical analysis of the multimarket contact theory in pharmaceutical markets," The European Journal of Health Economics, Springer, Springer, vol. 15(6), pages 623-643, July.
  6. Matthew Shum, 1998. "Characterizing Informational Barriers To Entry In The Anti-Ulcer Drug Market," Working Papers mshum-98-03, University of Toronto, Department of Economics.
  7. Moretto, Michele, 2000. "Irreversible investment with uncertainty and strategic behavior," Economic Modelling, Elsevier, Elsevier, vol. 17(4), pages 589-617, December.
  8. Antonio Cabrales & Sergi Jiménez-Martín, 2007. "The Determinants of Pricing in Pharmaceuticals: Are U.S. Prices Really Higher than Those of Canada?," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 697.07, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  9. Austan Goolsbee & Peter J. Klenow, 1999. "Evidence on Learning and Network Externalities in the Diffusion of Home Computers," NBER Working Papers 7329, National Bureau of Economic Research, Inc.
  10. Gautam Gowrisankaran & Joanna Stavins, 1999. "Network externalities and technology adoption: lessons from electronic payments," Working Papers, Federal Reserve Bank of Boston 99-5, Federal Reserve Bank of Boston.
  11. Desiraju, Ramarao & Nair, Harikesh S. & Chintagunta, Pradeep, 2004. "Diffusion of New Pharmaceutical Drugs in Developing and Developed Nations," Research Papers, Stanford University, Graduate School of Business 1950, Stanford University, Graduate School of Business.

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