Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs

Ernst R. Berndt, Robert Pindyck and Pierre Azoulay

Journal of Industrial Economics, 2003, vol. 51, issue 2, 243-270

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 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, and that they operate at the brand and not the therapeutic class level.

Date: 2003
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Citations: View citations in EconPapers (45)

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https://doi.org/10.1111/1467-6451.00200

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Working Paper: Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs (2000)
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