Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs

28 Pages Posted: 28 Sep 2003

See all articles by Ernst R. Berndt

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)

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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 H-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.

Suggested Citation

Berndt, Ernst R. and Pindyck, Robert S. and Azoulay, Pierre, Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs. Journal of Industrial Economics, Vol. 51, pp. 243-270, June 2003. Available at SSRN: https://ssrn.com/abstract=418946

Ernst R. Berndt (Contact Author)

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

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Robert S. Pindyck

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Pierre Azoulay

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

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