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Characterizing Informational Barriers To Entry In The Anti-Ulcer Drug Market

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  • Matthew Shum

Abstract

We empirically quantify and characterize informational barriers to entry into the anti-ulcer drug market by studying the diffusion process of the molecule Omeprazole in the first 30 months after it entered the market. Using a novel panel dataset tracking doctors' complete prescription histories, we specify and estimate a learning model in which doctors, initially uncertain about the quality differential between Omeprazole and the incumbent molecules, update their beliefs about this differential from first-hand experience after observing noisy signals from patients to whom they have prescribed the molecule. We find strong evidence that doctors' uncertainty about Omeprazole's quality is resolved by first-hand experience rather than through the pharmaceutical companies' marketing activities, so that learning through first-hand experience explains almost all of Omeprazole's diffusion path over our three-year sample period. This casts some doubt on previous researchers' findings, utilizing aggregate data, regarding the importance of marketing in securing market share for an entrant brand.

Suggested Citation

  • 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.
  • Handle: RePEc:tor:tecipa:mshum-98-03
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    File URL: https://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-MSHUM-98-03.ps
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    References listed on IDEAS

    as
    1. Bagwell, Kyle, 1990. "Informational product differentiation as a barrier to entry," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 207-223, June.
    2. Steven Berry & James Levinsohn & Ariel Pakes, 2004. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 68-105, February.
    3. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-365, June.
    4. Berndt, Ernst R. & Pindyck, Robert S. & Azoulay, Pierre, 1970-, 1998. "Network effects and diffusion in pharmaceutical markets : antiulcer drugs," Working papers WP 4059-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    Cited by:

    1. Andrew Ching, 2000. "Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration," Econometric Society World Congress 2000 Contributed Papers 1242, Econometric Society.

    More about this item

    Keywords

    pharmaceutical industry; barriers to entry; simulated maximum likelihood; diffusion models;

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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