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Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs


Ernst R. Berndt


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Robert S. Pindyck


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Pierre Azoulay


MIT Sloan School of Management; National Bureau of Economic Research (NBER)

June 2000

NBER Working Paper No. w7772

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. 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.

Number of Pages in PDF File: 55

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Date posted: July 17, 2000  

Suggested Citation

Berndt, Ernst R. and Pindyck, Robert S. and Azoulay, Pierre, Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs (June 2000). NBER Working Paper No. w7772. Available at SSRN: http://ssrn.com/abstract=235728

Contact Information

Ernst R. Berndt (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
Room E52-452
Cambridge, MA 02142
United States
617-253-2665 (Phone)
617-258-6055 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Robert S. Pindyck
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
50 Memorial Drive, E52-450
Cambridge, MA 02142
United States
617-253-6641 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Pierre Azoulay
MIT Sloan School of Management ( email )
50 Memorial Drive
Cambridge, MA 02139-4307
United States
HOME PAGE: http://scripts.mit.edu/~pazoulay/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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