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Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs

55 Pages Posted: 17 Jul 2000  

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

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 2000

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.

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: https://ssrn.com/abstract=235728

Ernst R. Berndt (Contact Author)

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Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER)

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Pierre Azoulay

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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HOME PAGE: http://scripts.mit.edu/~pazoulay/

National Bureau of Economic Research (NBER)

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