Marketing, Product Differentiation and Competition in the Market for Antiulcer Drugs

Abstract

This paper investigates one of the largest pharmaceutical markets using a discrete choice model that allows marketing to affect product differentiation. Four main results emerge from an analysis of monthly panel data on antiulcer drugs from 1977 to 1993. Observed drug characteristics became less important relative to marketing in determining demand. Total marketing by all firms reduced product differentiation and raised the cost of entry significantly. Although increasingly rivalrous, marketing expanded the market, increasing social welfare. Finally, estimated returns to eliminating one adverse drug interaction in the pioneer drug approximately equal its first two years of sales.

Keywords: Advertising, marketing, discrete choice, pharmaceutical market, product differentiation, simulation

JEL Classification: D12, L65, I11, M31, M37, C25