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Market Structure, R&D and Advertising in the Pharmaceutical Industry

Listed author(s):
  • Catherine Matraves

Recent developments in the literature on market structure have allowed the generation of a few key testable predictions from the theory of strategic behaviour. The seminal model considers one simple but general relationship, that between market structure and market size, focusing on the competitive roles of the endogenous sunk costs of advertising and/or research and development (R&D). Evidence presented in this case study, building on earlier econometric work, shows that such endogenous sunk costs do play a crucial role in the formation of market structure in the global pharmaceutical industry. ZUSAMMENFASSUNG - (Werbung, FuE und Marktstruktur in der pharmazeutischen Industrie) Jüngere Entwicklungen der Literatur zum Thema "Marktstruktur" ermöglichen es, robuste testbare Hypothesen aus der Theorie des strategischen Verhaltens abzuleiten. Das grundlegende industrieökonomische Modell geht von einer einfachen, aber allgemein gültigen Beziehung zwischen Konzentration und Marktgröße aus. Dabei wird insbesondere der Einfluß endogener versunkener Kosten für Werbung und/oder Forschung und Entwicklung (FuE) auf den Wettbewerb untersucht. Die empirischen Ergebnisse dieser Fallstudie zeigen, daß endogene versunkene Kosten tatsächlich eine entscheidende Rolle für die Herausbildung der Marktstruktur in der pharmazeutischen Industrie spielen. Die Ergebnisse zeigen jedoch auch, daß unternehmensspezifische Fähigkeiten geeignet sind, die Reaktionsweisen der Unternehmen im Wettbewerb zu erklären.

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Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number FS IV 98-17.

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Length: 31 pages
Date of creation: Sep 1998
Publication status: Published in the Journal of Industrial Economics , Vol. 47(2), June 1999, pp. 169-194.
Handle: RePEc:wzb:wzebiv:fsiv98-17
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  1. Rebecca Henderson & Iain Cockburn, 1996. "Scale, Scope, and Spillovers: The Determinants of Research Productivity in Drug Discovery," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 32-59, Spring.
  2. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G. & Lasagna, Louis, 1991. "Cost of innovation in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 10(2), pages 107-142, July.
  3. Henry Grabowski & John Vernon, 1990. "A New Look at the Returns and Risks to Pharmaceutical R&D," Management Science, INFORMS, vol. 36(7), pages 804-821, July.
  4. Steven Casper & Catherine Matraves, 1997. "Corporate Governance and Firm Strategy in the Pharmaceutical Industry," CIG Working Papers FS IV 97-20, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  5. Klepper, Gernot, 1992. "Pharmaceuticals - Who's Afraid of `1992'?," CEPR Discussion Papers 675, C.E.P.R. Discussion Papers.
  6. Robinson, William T & Chiang, Jeongwen, 1996. "Are Sutton's Predictions Robust?: Empirical Insights into Advertising, R&D, and Concentration," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 389-408, December.
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