Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs

Authors: Berndt, Ernst R.¹; Pindyck, Robert S.¹; Azoulay, Pierre²

Source: Journal of Industrial Economics, Volume 51, Number 2, June 2003 , pp. 243-270(28)

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Abstract:

We examine the role of consumption externalities in the demand for pharmaceuticals at both the brand level and over a therapeutic class of drugs. Externalities emerge when use of a drug by others affects its value, and/or conveys information about efficacy and safety to patients and physicians. This can affect the rate of market diffusion for a new entrant, and can lead to dominance of one drug 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, and that they operate at the brand and not the therapeutic class level.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/1467-6451.00200

Affiliations: 1: Massachusetts Institute of Technology, Cambridge, MA, USA. 2: Columbia University, New York, NY, USA.

Publication date: 2003-06-01