We examine the role of consumption externalities in the demand for pharmaceuticals at both the brand level and over a therapeutic class of drugs. These effects emerge when use of a drug by others affects its value, and/or conveys information abut efficacy and safety to patients and physicians. This can affect that rate of market diffusion for a new entrant, and can lead to herb behavior whereby a particular drug can dominate the market despite the availability of close substitutes. We use data for H2-antagonist antiulcer drugs to estimate a dynamic demand model and quantify these effects. The model has three components: an hedonic price equation that measures how the aggregate usage of a drug, as well as conventional attributes, affect brand valuation; equations relating equilibrium market shares to quality-adjusted prices and marketing levels; and diffusion equations describing the dynamic adjustment process. We find that consumption externalities influence both valuations and rates of diffusion, but that they operate at the brand and not the therapeutic class level.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7772.
Length: Date of creation: Jun 2000 Date of revision: Handle: RePEc:nbr:nberwo:7772
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References listed on IDEAS 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.:
Iain M. Cockburn & Aslam H. Anis, 2001.
"Hedonic Analysis of Arthritis Drugs,"
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Scharfstein, David. & Stein, Jeremy C., 1988.
"Herd behavior and investment,"
Working papers
WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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