Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration

51 Pages Posted: 27 Jun 2007 Last revised: 26 Feb 2015

See all articles by Glenn Ellison

Glenn Ellison

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Sara Fisher Ellison

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: April 2007

Abstract

This paper develops a new approach to testing for strategic entry deterrence and applies it to the behavior of pharmaceutical incumbents just before they lose patent protection. The approach involves looking at a cross-section of markets and examining whether behavior is nonmonotonic in the size of the market. Under certain conditions, investment levels will be monotone in market size if firms are not influenced by a desire to deter entry. Strategic investments, however, may be nonmonotone because entry deterrence is unnecessary in very small markets and impossible in very large ones, resulting in overall nonmonotonic investment. The pharmaceutical data contain advertising, product proliferation, and pricing information for a sample of drugs which lost patent protection between 1986 and 1992. Among the findings consistent with an entry deterrence motivation are that incumbents in markets of intermediate size have lower levels of advertising and are more likely to reduce advertising immediately prior to patent expiration.

Suggested Citation

Ellison, Glenn David and Fisher Ellison, Sara, Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration (April 2007). NBER Working Paper No. w13069. Available at SSRN: https://ssrn.com/abstract=986919

Glenn David Ellison (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Sara Fisher Ellison

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-262C
Cambridge, MA 02142
United States
617-253-3821 (Phone)
617-253-1330 (Fax)

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