Working Paper: NBER ID: w7024
Authors: Ernst R. Berndt; Robert S. Pindyck; Pierre Azoulay
Abstract: We examine the role of network effects in the demand for pharmaceuticals at both the brand level and for a therapeutic class of drugs. These effects emerge when use of a drug by others conveys information about its efficacy and safety to patients and physicians. This can lead to herd behavior where a particular drug -- not necessarily the most efficacious or safest -- can come to dominate the market despite the availability of close substitutes, and can also affect the rate of market diffusion. Using data for H2-antagonist antiulcer drugs, we examine two aspects of these effects. First, we use hedonic price procedures to estimate how the aggregate usage of a drug affects brand valuation. Second, we estimate discrete-time diffusion models at both the industry and brand levels to measure the impact on rates of diffusion and market saturation.
Keywords: network effects; pharmaceutical markets; antiulcer drugs; demand diffusion
JEL Codes: D12; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate usage of a drug (C43) | brand valuation (M37) |
| past sales (D44) | rate of diffusion of a drug (C22) |
| aggregate usage of a drug (C43) | perceived efficacy and safety (D18) |
| perceived efficacy and safety (D18) | brand valuation (M37) |
| past sales (D44) | accelerated adoption rates (D16) |
| awareness and word-of-mouth communication (O36) | diffusion process (O33) |