Value Appropriation and New Product Pricing: A Study of New Prescription Drugs

Abstract

Value appropriation, or a firm’s ability to collect economic rents from its offerings, tools can erect barriers to competition and influences firm profitability. Patent protections are widely used value appropriation tools, but usually the appropriability regimes are not extremely tight, patents are permeable, so firms need alternative value appropriation tools. To clarify the efficacy of patents in such appropriability regimes, this article presents an analysis of synergies across value appropriation tools and the moderating roles of product contextual factors. With a hedonic price regression model, in which value appropriation tools and product contextual factors determine the pricing power of a product, the authors analyze 328 newly launched branded prescription drugs introduced in the U.S. market during 1984–2003 and find that shorter patent exclusivity terms (i.e., remaining patent life at the time of drug launch) increase drug prices. Greater advertising spending, which represents a relevant value appropriation tool in branded prescription drug markets to achieve market penetration and reach more customers, relates positively to price decreases. The effects of patent protections and advertising spending on drug prices are synergistic, with advertising spends increasing value appropriation ability of patents. Finally, product contextual factors, i.e., product efficacy, benefit scope, and nicheness all moderate the influence of patents, i.e., they limit the reliance on patent protection. These findings have relevant implications for literature and policy.

Keywords: advertising, appropriability regimes, barriers to entry, healthcare, new products, patents, prescription drugs, pricing, product contextual factors, value appropriation.

JEL Classification: D43, L13, C01