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http://ssrn.com/abstract=1674027
 
 

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Dynamic Entry with Cross Product Spillovers: An Application to the Generic Drug Industry


A. Ronald Gallant


Duke University - Fuqua School of Business, Economics Group; New York University - Department of Economics

Han Hong


Duke University - Department of Economics

Ahmed Khwaja


Yale School of Management

March 2010

Economic Research Initiatives at Duke (ERID) Working Paper Series No. 57

Abstract:     
Experience in one product market can potentially improve firm performance in a related product market in the future. Thus, entry into a market is determined not just by profits in that market but also by its future impact on profitability in other markets. We formulate and estimate a dynamic model of entry decisions of firms in the presence of such spillovers using data on the generic drug industry. Spillovers imply that a firm’s unobserved “ability” to profit in a product market not only changes stochastically but is also is endogenous to past entry decisions. Therefore, the model needs to accommodate unobserved state variables that are endogenous to firm actions and serially correlated. We address the methodological challenge of estimating such a model using a sequential importance sampling based technique. Our estimates show significant spillover effects of entry on future profits. On average, each entry reduces costs by 7% at the next entry opportunity. On average there are eight entry opportunities annually. The average cumulative benefit of a firm that enters all eight markets in a year is 51%. We conclude that spillovers are critical in the equilibrium evolution of the structure of the generic drug industry.

Number of Pages in PDF File: 55

Keywords: Dynamic Spillovers, Generic Pharmaceuticals, Sequential Importance Sampling, Dynamic Discrete Games, Unobserved Endogenous State Variables, Serial Correlation

JEL Classification: E00, G12, C51, C52

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Date posted: September 9, 2010  

Suggested Citation

Gallant, A. Ronald and Hong, Han and Khwaja, Ahmed, Dynamic Entry with Cross Product Spillovers: An Application to the Generic Drug Industry (March 2010). Economic Research Initiatives at Duke (ERID) Working Paper Series No. 57. Available at SSRN: http://ssrn.com/abstract=1674027 or http://dx.doi.org/10.2139/ssrn.1674027

Contact Information

A. Ronald Gallant (Contact Author)
Duke University - Fuqua School of Business, Economics Group ( email )
Box 90097
Durham, NC 27708-0097
United States
New York University - Department of Economics ( email )
269 Mercer Street, 7th Floor
New York, NY 10011
United States
Han Hong
Duke University - Department of Economics ( email )
Durham, NC 27708-0204
United States
919-660-1890 (Phone)
919-684-8974 (Fax)
Ahmed Khwaja
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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