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Network Effects and Diffusion in Pharmaceutical Markets: Antiulcer Drugs

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Author Info
Ernst R. Berndt
Robert S. Pindyck
Pierre Azoulay

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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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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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Find related papers by JEL classification:
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology

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  1. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-70, Summer. [Downloadable!] (restricted)
  2. Griliches, Zvi, 1990. "Patent Statistics as Economic Indicators: A Survey," Journal of Economic Literature, American Economic Association, vol. 28(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
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  4. Daniel P. Kessler & Mark McClellan, 1996. "Do Doctors Practice Defensive Medicine?," NBER Working Papers 5466, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
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  6. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
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  7. Berndt, Ernst R, et al, 1995. "Information, Marketing, and Pricing in the U.S. Antiulcer Drug Market," American Economic Review, American Economic Association, vol. 85(2), pages 100-105, May. [Downloadable!] (restricted)
  8. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August. [Downloadable!] (restricted)
  9. Kessler, Daniel & McClellan, Mark, 1996. "Do Doctors Practice Defensive Medicine?," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 353-90, May. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  11. Zvi Griliches, 1958. "Research Costs and Social Returns: Hybrid Corn and Related Innovations," Journal of Political Economy, University of Chicago Press, vol. 66, pages 419. [Downloadable!] (restricted)
  12. Jay Pil Choi, 1997. "Herd Behavior, the 'Penguin Effect,' and the Suppression of Informational Diffusion: An Analysis of Informational Externalities and Payoff Interdependency," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 407-425, Autumn. [Downloadable!] (restricted)
  13. repec:fth:harver:1473 is not listed on IDEAS
  14. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
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  15. Besen, Stanley M & Farrell, Joseph, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-31, Spring. [Downloadable!] (restricted)
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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. Gautam Gowrisankaran & Joanna Stavins, 1999. "Network externalities and technology adoption: lessons from electronic payments," Working Papers 99-5, Federal Reserve Bank of Boston. [Downloadable!]
  2. Antonio Cabrales & Sergi Jiménez-Martín, 2008. "The Determinants of Pricing in Pharmaceuticals: Are U.S. prices really so high?," Working Papers 2008-18, FEDEA. [Downloadable!]
  3. Jonathan Skinner & Douglas Staiger, 2005. "Technology Adoption From Hybrid Corn to Beta Blockers," NBER Working Papers 11251, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. 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. [Downloadable!]
  5. David Dranove & Neil Gandal, 2000. "The DVD vs. DIVX Standard War: Empirical Evidence of Vaporware," Department of Economics, Working Paper Series 1019, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
    Other versions:
  7. 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 697.07, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  8. Zhao, Jinhua, 2005. "The Role of Information in Technology Adoption under Poverty," Working Papers RP2005/41, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  9. Desiraju, Ramarao & Nair, Harikesh S. & Chintagunta, Pradeep, 2004. "Diffusion of New Pharmaceutical Drugs in Developing and Developed Nations," Research Papers 1950, Stanford University, Graduate School of Business. [Downloadable!]
  10. Andersson, Kjetil & Foros, Øystein & Steen, Frode, 2006. "Text and Voice: Complements, Substitutes or Both?," CEPR Discussion Papers 5780, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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