Working Paper: NBER ID: w13069
Authors: Glenn Ellison; Sara Fisher Ellison
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.
Keywords: entry deterrence; pharmaceutical incumbents; patent expiration; strategic investments
JEL Codes: L13; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Intermediate-sized markets (D40) | Lower levels of advertising (M37) |
| Market size (L25) | Advertising levels (M38) |
| Market size (L25) | Changes in incumbent behavior as patent expiration nears (D43) |
| Nonmonotonic relationship (C29) | Evidence of strategic entry deterrence (L12) |
| Advertising levels (M38) | Deterrence of entry (L11) |
| Market size (L25) | Detail advertising (M37) |