Information, Marketing, and Pricing in the US. Antiulcer Drug Market
`
`Ernst R. Berndt; Linda Bui; David R. Reiley; Glen L. Urban
`
`The American Economic Review, Vol. 85, No. 2, Papers and Proceedings of the Hundredth and
`Seventh Annual Meeting of the American Economic Association Washington, DC, January 6-8,
`1995. (May, 1995), pp. 100-105.
`
`Stable URL:
`://1inks.'stor.orhtt sici?s-ici=0002-8282%28199505%2985%3A2%3C100%3AIMAPlT%3E2.0.CO%3B2-5
`
`
`
`
`
`The American Econom'c Review is currently published by American Economic Association.
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`Sun Oct 21 15:25:53 2007
`
`Argentum Pharm. LLC v. Alcon Research, Ltd.
`Case IPR2017-01053
`
`ALCON 2066
`
`

`

`
`
`
`Information, Marketing, and Pricing
`
`
`
`
`
`
`
`in the U.S. Antiulcer Drug Market
`
`
`
`
`By ERNST R. BERNDT, LINDA BUI, DAVID R. REILEY, AND GLEN L. URBAN*
`
`
`
`
`
`
`
`
`
`
`Introduced into the United States in 1977,
`
`
`
`
`
`
`Tagamet was the pioneer product
`in the
`
`
`
`
`
`
`class of antiulcer drugs known as H2-
`
`
`
`
`
`antagonists. By promoting ulcer healing
`
`
`
`
`
`through inhibiting acid secretion, Tagamet
`
`
`
`
`
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`
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`was able to heal ulcers and treat pre-ulcer
`
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`
`
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`conditions pharmacologically on an outpa-
`
`
`
`
`
`
`tient basis,
`thereby substituting for more
`
`
`
`
`
`
`costly hospital admissions and surgeries. In
`
`
`
`
`
`1983 another HZ-antagonist called Zantac
`
`
`
`
`
`
`
`
`entered, and by early 1987 US. Zantac sales
`
`
`
`
`
`
`surpassed those of the pioneering Tagamet.
`
`
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`
`
`Today there are four Hz-antagonists sold in
`
`
`
`
`
`
`the United States: Tagamet, Zantac, Pep-
`
`
`
`
`
`
`
`
`cid, and Axid. Zantac is now the world’s
`
`
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`
`
`
`largest selling prescription drug, having esti-
`mated worldwide sales in 1994 of about $4
`
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`
`
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`billion. Each of the four Hz-antagonists is
`
`
`
`
`
`
`
`
`among the top 100 in world drug sales,
`
`
`
`
`
`
`although Tagamet lost US. patent protec-
`
`
`
`
`
`tion on May 17, 1994.
`
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`
`
`In this paper we examine empirically the
`
`
`
`
`
`
`role of information in facilitating and ex-
`
`
`
`
`
`
`plaining growth of the overall antiulcer drug
`
`
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`
`
`
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`market, as well as in shaping the changing
`
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`
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`market shares of the four patented prod-
`ucts. The dissemination of information is
`
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`
`
`
`
`
`
`
`
`due largely to the use of marketing chan-
`
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`
`
`
`nels, such as Visits by manufacturers’ repre-
`
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`
`
`
`sentatives to physicians (called “detailing”),
`
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`
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`*Berndt: Sloan School of Management, Mas-
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`
`
`sachusetts Institute of Technology, Cambridge, MA
`
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`
`
`
`
`02142; Bui: Department of Economics, Boston Univer-
`
`
`
`
`
`
`
`sity, 270 Bay State Road, Boston, MA 02215; Reiley:
`
`
`
`
`
`
`
`
`
`Department of Economics, Massachusetts Institute of
`
`
`
`
`
`
`Technology; Urban: Sloan School of Management,
`
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`
`
`
`Massachusetts Institute of Technology. Financial sup-
`
`
`
`
`
`
`port from the Alfred P. Sloan Foundation is gratefully
`
`
`
`
`
`
`
`
`
`acknowledged, as is data support
`from Stephen C.
`
`
`
`
`
`
`
`
`Chappell of IMS International, J. Stanley Hull of Glaxo
`
`
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`
`
`
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`Pharmaceuticals, Ditas Riad of Merck & Co., and
`
`
`
`
`
`
`
`
`William Moore of Lowe & Partners /SMS. Any views
`
`
`
`
`
`
`
`
`and opinions expressed here are attributable only to
`
`
`
`
`
`
`
`
`the authors.
`
`
`
`100
`
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`
`
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`advertising in medical journals, and most
`
`
`
`recently, by direct-to-consumer advertising.
`
`
`
`
`
`
`We examine these and also explore pricing
`
`
`
`
`policies, product differentiation, and order-
`
`
`of-entry effects.
`
`
`
`
`
`
`I. Background
`
`
`
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`
`
`
`
`
`
`
`There are two cost conditions that have
`
`
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`
`
`
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`
`
`considerable bearing on the structure and
`
`
`
`
`behavior of the pharmaceutical
`industry.
`
`
`
`
`
`
`
`First, sunk costs are very large. In particu-
`
`
`
`
`
`
`
`
`lar, the costs of bringing a product to mar-
`
`
`
`
`
`ket (doing basic research, winning patent
`
`
`
`
`approval, engaging in development, per-
`
`
`
`
`
`
`forming clinical
`trials, and obtaining final
`
`
`
`
`
`
`
`approval from the Food and Drug Adminis-
`
`
`
`
`
`
`tration [FDAD are currently estimated at
`
`
`
`
`
`
`
`about $360 million per drug. Second, for
`
`
`
`
`most
`traditional pharmaceutical products,
`
`
`
`
`
`
`
`the marginal costs of manufacturing are very
`
`
`
`
`
`
`small. Although appropriate cost data are
`
`
`
`
`
`
`
`not publicly available,
`it is not uncommon
`
`
`
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`
`
`
`
`
`for generic drugs to sell at 25—30 percent of
`
`
`
`
`the pre-patent-expiration price.
`Informal
`
`
`
`
`
`discussions with industry officials suggest
`
`
`
`
`
`
`that for the HZ-antagonists, production costs
`
`
`
`
`
`
`
`are about 10—25 percent of the price.
`
`
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`These cost conditions have implications
`
`
`
`
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`
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`for pricing. Patent protection gives firms the
`
`
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`
`
`ability to influence price, and to the extent
`
`
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`
`
`one is willing to use the Lerner markup
`
`
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`
`
`
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`relation as a pricing rule of thumb, one
`
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`
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`would expect price and marginal-cost condi-
`
`
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`
`
`
`tions to approximate (P —MC)/P = —1/ep,
`
`
`
`
`
`
`
`
`where cap
`is the demand price elasticity.
`
`
`
`
`
`
`With manufacturing costs at 10—25 percent
`
`
`
`
`
`
`
`of price (markups 75—90 percent), the im-
`
`
`
`
`
`
`plied demand price elasticity would range
`
`
`
`
`
`
`
`from — 1.1 to — 1.3. However, elasticities of
`
`
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`
`
`that size contrast with the common percep-
`
`
`
`
`
`
`
`tion that demand for prescription drugs is
`
`
`
`
`
`
`extremely price inelastic. Peter Temin (1980
`
`
`
`
`
`
`
`Ch. 5), for example, notes that physicians
`
`

`

`VOL. 85 N0. 2
`
`
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`
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`INFORMA TION, EDUCA TING, AND MARKETING IN HEAL TH CARE
`
`
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`
`101
`
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`traditionally have been relatively unaware
`
`
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`
`
`of drug prices. Other observers have sug-
`
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`
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`
`
`gested that moral hazard in the form of
`
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`
`
`third-party (insurance) payment practices
`
`
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`
`
`also contributes to low price responsiveness.
`
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`
`
`Very little econometric evidence on demand
`
`
`
`
`
`
`
`elasticities for drugs is available,
`in part
`because the traditional consumer demand
`
`
`
`
`
`
`
`
`
`paradigm (utility maximization, marginal
`
`
`
`
`
`
`substitution equal
`to relative
`rates of
`
`
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`
`
`
`marginal prices, etc.) cannot be expected to
`
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`
`describe behavior adequately in a market in
`
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`which principal—agent problems (stemming
`
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`
`from relationships among physicians, pa-
`
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`
`
`tients, and insurers) are widespread.1 In this
`
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`
`paper we report elasticity estimates viewed
`
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`
`from the vantage of the firm, not the “con-
`
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`sumer”-whoever that may be.
`
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`
`Since marginal production costs are small,
`
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`
`enhancing revenues is essentially the same
`
`
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`
`
`as increasing profits, and thus drug firms
`
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`
`face strong incentives to shift out the de-
`
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`
`
`
`mand curves. Thus it is not surprising that
`
`
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`
`
`marketing—sales ratios are quite high in the
`
`
`
`
`pharmaceutical industry. The largest com-
`
`
`
`
`
`ponent (70—80 percent) of marketing has
`
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`
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`traditionally involved detailing to physi-
`
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`
`
`cians; it consists of a company representa-
`
`
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`
`
`tive providing as much product information
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`as possible to physicians, given the typical
`short time of the visit (3—10 minutes) and
`
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`the content regulation enforced by the FDA.
`
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`Medical journal advertising is also carried
`
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`
`
`out but is less extensive than detailing. Fi-
`
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`
`
`nally, in the last few years, pharmaceutical
`
`
`
`
`
`companies have increasingly employed di-
`
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`
`
`rect-to-consumer
`advertising in various
`media.
`
`
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`
`
`The information content of marketing ef-
`
`
`
`
`
`forts deals primarily with product differen-
`
`
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`
`
`tiation and nonprice aspects. In the H2-
`
`
`
`
`antagonists market,
`five quality attributes
`
`
`
`
`
`
`are of particular importance.2 First, the var-
`
`
`
`
`
`ious Hz-antagonists are viewed as being
`
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`
`roughly similar in efficacy (the four- to six-
`
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`
`
`1See, however, Michael Baye et al. (1994).
`
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`
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`2For more extensive discussion, see Berndt et al.
`
`
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`
`
`
`(1994).
`
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`week treatment healing rate is about 70—80
`
`
`
`
`
`percent for duodenal ulcer patients), al-
`
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`
`
`
`though there is some evidence suggesting
`
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`
`
`
`that Zantac has a significantly lower relapse
`
`
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`
`
`
`rate than does. Tagamet for patients on duo-
`denal maintenance treated at recommended
`
`
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`
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`
`
`
`
`
`dosages (see K. R. Gough et al., 1984).
`
`
`
`
`
`
`Second,
`less frequent dosages are thought
`
`
`
`
`
`
`to enhance patient compliance. When Zan-
`
`
`
`
`
`
`
`
`tac entered the US. market
`in 1983,
`its
`
`
`
`
`
`twice-daily dosing frequency was considered
`
`
`
`
`
`
`
`more favorable than the regimen of four
`
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`
`
`times a day recommended for Tagamet.
`
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`
`
`Tagamet responded with a twice-a-day ver-
`
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`
`
`
`sion in late 1984, after which considerable
`
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`
`
`rivalry ensued; today all four Hz-antagonists
`
`
`
`
`
`
`have a once-a-day version. A third quality
`attribute involves adverse interactions with
`
`
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`
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`
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`
`
`other drugs. Here Tagamet has been on the
`
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`
`
`defensive, for early on it was discovered
`
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`
`
`that Tagamet interacted with the liver and
`
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`
`
`
`
`
`kidney system in a way that could affect the
`
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`
`
`
`metabolism of other drugs. As of 1994,
`
`
`
`
`
`
`Tagamet had reported to the FDA signifi-
`
`
`
`
`
`
`cant drug interactions with ten other drugs,
`
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`
`
`
`whereas Zantac and Axid had only one re-
`
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`
`
`ported drug interaction, and Pepcid had
`
`
`
`
`
`none. A fourth quality characteristic in-
`
`
`
`
`
`
`
`volves side effects. Here again Tagamet has
`
`
`
`
`
`
`
`been somewhat on the defensive, for condi-
`tions such as mental confusion in the el-
`
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`
`
`
`
`
`
`
`
`
`derly and gynecomastia (breast swelling) for
`
`
`
`
`
`
`
`males are apparently not as prevalent with
`
`
`
`
`
`
`
`Zantac, Pepcid, and Axid. Finally, the four
`
`
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`
`
`
`
`products compete in terms of medical con-
`ditions (indications) for which the FDA has
`
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`
`
`
`
`
`
`
`
`granted treatment
`approval. Although
`
`
`
`
`
`
`
`
`Tagamet was the first to win approval for
`
`
`
`
`
`
`the treatment of duodenal ulcers, duodenal
`
`
`
`
`
`
`ulcer maintenance, and gastric ulcers,
`in
`
`
`
`
`
`
`
`
`1986 Zantac was the first to obtain approval
`
`
`
`
`for gastroesophageal
`reflux disease
`
`
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`
`
`
`(GERD), a rather common condition that
`
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`
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`ranges from modest heartburn and acid in-
`
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`digestion to being a very serious condition.
`
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`
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`The FDA permits marketing only for ap-
`
`
`
`
`
`proved indications. Although Tagamet ob-
`
`
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`
`
`tained FDA approval for GERD in 1991,
`
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`and even though Tagamet had very similar
`
`
`
`
`
`
`
`effects to Zantac, suggesting that it would
`
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`
`
`
`
`likely also be effective in treating GERD,
`
`
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`
`
`not having FDA approval
`for GERD
`
`

`

`102
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`AEA PAPERS AND PROCEEDINGS
`
`
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`
`
`MAYI995
`
`
`
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`
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`
`
`advertising (DCA).3 It is worth noting that
`
`
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`
`
`the DCA efforts for Hz-antagonists did not
`
`
`
`
`
`
`
`mention any drug by name, but only encour-
`
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`
`
`
`aged Viewers
`to seek advice from their
`
`
`
`
`
`physician if they experience heartburn and
`
`
`acid indigestion.
`
`
`
`
`
`Although such DCA advertising is plausi-
`
`
`
`
`
`bly intended to augment overall
`industry
`
`
`
`
`
`
`demand, when two or more products exist,
`
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`marketing efforts are often only focused on
`
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`
`
`a particular brand. During its monopoly era,
`
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`
`
`
`
`Tagamet recouped all
`the benefits of its
`
`
`
`
`
`
`marketing efforts (it had 100 percent market
`
`
`
`
`share).4 However, once Zantac entered,
`
`
`
`
`
`even though rivalry between Tagamet and
`
`
`
`
`
`Zantac was
`intense,
`some of Tagamet’s
`
`
`
`
`
`
`marketing efforts might have spilled over to
`
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`
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`
`
`the benefit of Zantac, and Vice versa. Simi-
`
`
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`
`
`larly, once Pepcid and Axid entered, while
`
`
`
`
`
`marketing efforts were typically focused on
`
`
`
`
`
`specific brands, spillovers to Zantac and
`
`
`
`
`
`
`Tagamet might have occurred. To allow for
`
`
`
`marketing spillovers
`affecting industry
`
`
`
`
`(rather than just product-specific) demand,
`
`
`
`
`
`we define the effective industry marketing
`
`
`
`
`
`
`
`stock S,* as a weighted sum of the market-
`
`
`
`
`
`ing information stocks originally formed in
`various market structures:
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
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`
`
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`
`
`
`
`
`
`
`(2)
`
`32* = #1512 + #252: + #333: + #4542
`
`
`
`
`
`
`
`is the surviving marketing infor-
`where S1,
`
`
`
`
`
`
`
`
`mation stock at end of month t that origi-
`
`
`
`
`
`nally accumulated in the Tagamet monopoly
`
`
`
`
`
`
`
`era, 522 is the similar stock formed during
`
`
`
`
`
`the Tagamet-Zantac duopoly, S3,
`is
`that
`
`
`
`from the Tagamet-Zantac—Pepcid triopoly,
`
`
`
`
`
`
`and S4,
`is that from the Tagamet-Zantac-
`
`
`
`
`
`
`Pepcid-Axid rivalry. Since in a monopoly all
`
`
`
`
`marketing efforts affect
`industry demand,
`
`
`
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`
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`
`
`
`
`
`
`
`
`(whereas Zantac did) may have constituted
`
`
`
`
`
`a significant marketplace disadvantage for
`
`Tagamet.
`
`
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`
`
`In terms of pricing, at entry Zantac was
`
`
`
`
`
`
`
`priced at an 80-percent premium over Taga-
`
`
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`
`
`
`met, but by May 1994 this premium had
`
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`
`
`gradually declined to 19 percent. In May
`
`
`
`
`
`
`
`
`1994, the price per day’s treatment (to drug
`
`
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`
`
`
`
`stores) was $2.61 for Zantac, $2.56 for Axid,
`
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`
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`
`
`
`$2.30 for Tagamet, and $2.17 for Pepcid;
`
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`
`
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`
`
`quantity shares for the four products were
`
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`
`
`
`
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`
`49 percent, 12 percent, 22 percent, and 17
`
`
`percent, respectively.
`
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`
`
`To understand the roles of marketing,
`
`
`
`
`
`pricing, and quality attributes in explaining
`
`
`
`
`
`
`the growth and changing composition of the
`
`
`
`
`
`HZ-antagonist market, we now outline an
`
`
`
`
`
`econometric model
`first
`for
`the H2-
`
`
`
`
`
`
`
`antagonist industry as a whole, and then for
`
`
`
`
`
`
`
`
`the market shares garnered by the four H2-
`
`
`antagonist drugs.
`
`
`
`
`
`
`
`
`11. An Econometric Model
`
`
`
`
`
`
`
`
`of the Hz-Antagonist Market
`
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`
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`
`
`At the industry level, we expect the quan-
`
`
`
`
`
`
`
`tity demanded (number of patient days of
`
`
`
`
`
`
`duodenal-ulcer therapY) to depend on price
`
`
`
`
`
`per treatment day, various marketing ef-
`
`
`
`
`
`forts, and quality attributes. Since market-
`
`
`
`
`
`ing efforts provide long-lived information, it
`
`
`
`
`important
`that cumulative information
`is
`
`
`
`
`stocks be distinguished from current-period
`new information flows. Define the cumula-
`
`
`
`
`
`
`
`
`
`
`
`tive marketing information stock S, at end
`of month t as
`
`
`
`
`
`
`
`
`
`
`
`(1)
`
`5.
`
`(1—5)Sz_1+E
`
`(1_8)TFt—T
`
`t Z
`
`'r=0
`
`
`
`
`
`
`
`
`
`
`
`
`where F, is the flow of new marketing infor-
`
`
`
`
`
`
`
`
`mation efforts during month t, and 8 is the
`
`
`
`
`
`
`monthly depreciation rate. Since 6 is un-
`
`
`
`
`
`
`known, we estimate it econometrically. In
`
`
`
`
`
`
`terms of marketing efforts, we distinguish
`
`
`
`
`
`
`
`three channels: the minutes of detailing to
`
`
`
`
`
`
`
`physicians (DET), the number of pages of
`
`
`
`
`
`medical-journal advertising (PJL), and the
`
`
`
`
`
`target rating points of direct-to-consumer
`
`3Target rating points are defined as the target reach
`
`
`
`
`
`
`
`
`(the percentage of the over—age-35 population who
`
`
`
`
`
`
`
`view the message over the course of the ad campaign)
`
`
`
`
`
`
`
`
`
`
`times the frequency, where frequency is the number of
`
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`
`
`
`
`
`
`
`times the average target individual views the message.
`
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`
`
`
`
`
`For further discussion, see Philip Kotler (1991 pp.
`
`
`
`
`
`
`
`
`606—8). The proprietary DCA data were kindly pro-
`
`
`
`
`
`
`
`
`vided us by Lowe & Partners / SMS in cooperation with
`
`
`
`
`
`
`
`
`
`Glaxo, Inc.
`
`
`4The discussion that follows is based in large part
`
`
`
`
`
`
`
`on Berndt et a1. (1994).
`
`
`
`
`
`
`
`
`

`

`VOL. 85 NO. 2
`
`
`
`
`INFORMA TION, EDUCA TING, AND MARKETING IN HEAL TH CARE
`
`
`
`
`
`
`
`
`
`103
`
`
`
`
`
`
`
`
`
`
`we normalize the ,u’s by setting #1: 1.
`
`
`
`
`
`Several interesting hypotheses involve the
`
`
`
`
`
`
`
`
`,u’s. First, if the effectiveness of firms’ mar-
`
`
`
`
`
`
`
`keting on industry sales is independent of
`
`
`
`
`
`market structure,
`then M = M3 = ,u4 = 1.
`
`
`
`
`
`
`
`
`
`Second,
`if in the presence of competition
`
`
`
`
`
`
`marketing efforts only affect market shares
`
`
`
`
`
`
`
`and have a zero-sum impact on industry
`
`
`
`
`
`demand, then ,u2 = 11.3 = ,u4 = 0. Finally,
`if
`
`
`
`
`
`
`the industry sales-augmenting effects of
`
`
`
`
`
`
`
`firms’ marketing decline as the number of
`
`
`
`
`
`
`
`products in the industry increases, then 1 >
`#2 > #3 > #4 > 0-
`
`
`
`
`
`For our industry demand equation, we
`
`
`
`
`
`
`
`specify a log-log model, where Q,
`is quan-
`
`
`
`
`
`
`is CPI-deflated price, DET,*, PJL’f,
`tity, P,
`
`
`
`
`
`
`and DCA”; are the effective industry stocks
`
`
`
`
`
`
`
`
`defined in (l) and (2), and DGERD is a
`
`
`
`
`
`
`
`dummy variable taking on the value of 1
`
`
`
`
`
`following FDA approval for GERD:
`
`
`
`
`
`
`
`
`
`
`
`
`and
`pages marketing stocks, LNDTJI
`
`
`
`
`
`
`LNJPJ 1; the number of adverse drug inter-
`
`
`
`
`
`
`actions for product j relative to Tagamet,
`
`
`
`
`LNINTJ 1;6 a discrete variable, DSGERD,
`
`
`
`
`
`indicating whether product j has a GERD
`
`
`
`
`
`indication advantage relative to Tagamet (1,
`
`
`
`
`
`advantage; 0, no advantage; —1, disadvan-
`
`
`
`
`tage); an order-of—entry variable, ENTRY,
`
`
`
`
`
`
`
`
`taking on the value of 2 for all Zantac
`
`
`
`
`
`
`
`observations, 3 for Pepcid, and 4 for Axid;
`
`
`
`
`
`
`and an AGE variable indicating the number
`
`
`
`
`
`
`
`of months product j has been in the mar-
`
`
`
`ketplace. Again, an instrumental-variable
`
`
`
`
`
`
`procedure is employed to allow for simul-
`
`taneity.
`
`
`
`
`
`
`Our data sources are described more fully
`
`
`
`
`
`
`in Berndt et a1. (1994).7 The direct-to-con-
`
`
`
`
`
`
`sumer marketing data are for a campaign
`
`
`
`
`
`
`begun by Glaxo (the manufacturer of Zan-
`
`
`
`
`
`
`
`tac) in June 1992, and they extend through
`
`
`May 1994.
`
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`
`
`
`
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`
`
`
`
`
`
`
`
`
`
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`
`
`(3) LNQ, = [30 + filLNP, + BZLNDETf
`
`
`
`
`
`III. Econometric Results
`
`
`
`
`
`+ B3LNPJL"; + B4LNDCA=§
`
`+ BSDGERD, + 3,.
`
`
`
`
`
`
`
`Since the effective industry marketing stocks
`
`
`
`
`
`
`
`
`depend nonlinearly on the ,u’s and 6’s, and
`
`
`
`
`
`
`since marketing efforts, pricing, and quan-
`
`
`
`
`
`
`
`
`tity demanded are likely to be jointly deter-
`
`
`
`
`
`
`mined (see Richard Schmalensee 1972), we
`
`
`
`
`
`
`
`estimate parameters in equation (3) by non-
`
`
`
`
`
`linear two-stage least squares (NL-ZSLS).5
`Our econometric model of market shares
`
`
`
`
`
`
`
`
`
`
`
`follows Urban et al.
`(1986)
`in specifying
`
`
`
`
`
`variables relative to the incumbent (Taga-
`
`
`
`
`
`
`met). In particular, using a log-log frame-
`
`
`
`
`
`
`
`work, we specify that in month t, demand
`
`
`
`
`
`
`
`quantities of product j relative to the in-
`
`
`
`
`cumbent [ln(Qj/Q1)E LNQJ 1, j = Zantac,
`
`
`
`
`
`Pepcid, Axid] depend on: relative prices,
`
`
`
`
`LNPRJl;
`relative detailing and journal-
`
`
`
`
`
`
`
`
`
`
`5As instruments, we employ the producer price in-
`
`
`
`
`
`
`
`dex for intermediate goods, production worker wages
`
`
`
`
`
`
`
`in the pharmaceutical industry, cumulative marketing
`
`
`
`
`
`
`efforts by the four companies on non-HZ-antagonist
`
`
`
`
`
`
`
`products for each of the three instruments, and time.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Based on 201 monthly observations from
`
`
`
`
`
`
`September 1977 through May 1994, we esti-
`
`
`
`
`
`
`mated parameters of equation (3) for the
`
`
`
`
`
`industry using NL-ZSLS. To be parsimo-
`
`
`
`
`
`
`
`nious in parameters, we constrained the M’s
`and 8’s to be the same for the DET and
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`PJL marketing stocks, but allowed 6 to dif-
`
`
`
`
`
`
`
`
`fer for DCA. The preferred model was cho-
`sen based on the lowest value of the tradi-
`
`
`
`
`
`
`
`
`
`tional NL-2SLS residual criterion function.
`
`
`
`
`
`
`
`
`
`Our estimated HZ-antagonist
`industry
`
`
`
`
`
`
`
`price elasticity is —0.689 (t = 3.80), while
`
`
`
`
`
`
`
`elasticity estimates for the DET, PJL, and
`
`
`
`
`
`
`
`DCA surviving stocks are 0.553 (t= 7.52),
`
`
`
`
`
`
`
`
`0.198 (t = 2.79) and 0.008 (t = 2.67).8 Hence,
`
`
`
`
`
`
`
`
`industry demand is positively affected by all
`
`
`
`
`
`
`
`three of the firms’ marketing channels, but
`
`
`
`
`
`
`
`
`
`DET is most effective; the sum of the three
`
`
`
`
`
`marketing elasticities is 0.759, suggesting
`
`
`
`
`
`
`
`decreasing returns to scale.
`In terms of
`
`f’To accommodate zeros, 1.0 is added to both the
`
`
`
`
`
`
`
`DCA and the INT variables.
`
`
`
`
`
`7Here we extend the Berndt et al. (1994) data base
`
`
`
`
`
`
`
`
`to May 1994. Data on prices, quantities, detailing, and
`
`
`
`
`
`
`
`
`journal pages are from IMS International.
`
`
`
`
`
`
`8The equation R2 is 0.995, and the Durbin-Watson
`
`
`
`
`
`
`
`statistic is 1.912.
`
`
`
`
`
`
`
`
`
`
`
`

`

`104
`
`
`
`AEA PAPERS AND PROCEEDINGS
`
`
`
`
`
`AMY1995
`
`
`
`
`
`
`
`
`
`
`
`
`
`,u3, and ,u4
`spillovers, the estimates of 112,
`
`
`
`
`
`
`
`
`are 0.601 (t=6.59), 0.924 (t=5.30), and
`
`
`
`
`
`
`
`
`
`0.410 (t = 4.00); these ,u’s are jointly signif-
`
`
`
`
`
`
`
`
`icantly different from 1, and from zero, indi—
`
`
`
`
`
`
`cating that marketing spillovers occur and
`
`
`
`
`
`
`the effectiveness of firms’ marketing
`that
`
`
`
`
`
`
`
`efforts on industry sales depends on market
`
`
`
`
`
`
`structure. The extent
`to which spillovers
`
`
`
`
`
`
`occur, however, does not decline monotoni-
`
`
`
`
`
`
`
`
`cally with the number of products in the
`
`
`
`
`
`
`market. The DGERD dummy variable co-
`
`
`
`
`
`
`
`efficient
`is 0.104 (t = 3.20), indicating that
`
`
`
`
`
`
`
`
`FDA approval for GERD increased the size
`
`
`
`
`
`
`
`of the HZ-antagonist market by about 10
`
`
`
`
`
`percent. Finally,
`the NL-2SLS criterion
`
`
`
`
`
`
`
`
`function is optimized at the point where 5
`
`
`
`
`
`
`
`
`
`for the DET and PJL stocks is 0.00, while
`
`
`
`
`
`
`
`
`
`that for the DCA stock is 0.15 (t =0.20),
`
`
`
`
`
`
`
`implying an annual DCA deterioration rate
`
`
`
`
`
`
`
`
`of about 80 percent. Although we are some-
`
`
`
`
`
`
`what surprised that the information stocks
`
`
`
`
`
`
`
`
`of DCA and PJL marketing do not depreci-
`
`
`
`
`
`
`
`
`
`
`ate at all, we note that a similar 8 = 0
`
`
`
`
`
`
`
`finding in the context of R&D knowledge
`
`
`
`
`
`
`
`stocks has been reported by ZVi Griliches
`
`
`
`
`and Frank Lichtenberg (1984).
`
`
`
`
`
`Turning now to econometric results based
`
`
`
`
`
`
`on the market-share model, we obtained the
`
`
`
`
`
`following NL-ZSLS results, based on 291
`
`
`monthly observations:
`
`
`
`
`
`LNQJ 1 , = — 0.427 ENTRY — 0.667 LNPRJ 1 1
`(44.00)
`(8.95)
`
`+ 0.649LNDTJ1,+ 0.167LNJPJ1
`(19.77)
`(6.31)
`
`
`
`+ 0.052DSGERD,— 0.252LNINTJ1
`
`
`
`(2.17)
`(9.00)
`
`
`
`+
`
`0.010AGE
`(16.65)
`
`
`
`
`
`
`
`
`with an R2 of 0.983. Order-of—entry effects
`
`
`
`
`
`
`are negative and strong, implying significant
`
`
`
`
`
`first-mover advantages, consistent with evi—
`
`
`
`
`
`
`
`
`dence from other markets (see Urban et al.,
`
`
`
`
`1986). The within—Hz-antagonist price-elas-
`
`
`
`
`
`
`
`ticity estimate is — 0.67 and significant, while
`
`
`
`
`
`
`coefficients on relative stocks of detailing
`
`
`
`
`
`
`(0.649) and journal pages of advertising
`
`
`
`
`
`
`
`(0.167) are positive and significant. The esti-
`
`
`
`
`
`
`
`mated monthly depreciation rate for the
`
`
`
`
`
`
`
`
`DET and PJL stocks is 0.030 (t=13.77),
`
`
`
`
`
`implying that relative information market-
`
`
`
`
`
`
`
`ing stocks deteriorate at about 30 percent
`
`
`
`
`
`
`
`per year. With respect to quality variables,
`
`
`
`
`
`
`
`the DSGERD coefficient is 0.05, while that
`
`
`
`
`
`
`on relative adverse drug interactions is
`
`
`
`
`
`—0.25, suggesting that Tagamet’s market
`
`
`
`
`
`
`share was significantly negatively affected by
`
`
`
`
`
`
`
`its disadvantages in terms of GERD and
`
`
`
`
`
`adverse drug interactions
`in the H2-
`
`
`
`
`
`antagonist market. Finally, the age coeffi-
`
`
`
`
`
`cient
`is positive and significant,
`implying
`
`
`
`
`
`
`that, ceteris paribus, longevity in the mar-
`
`
`
`
`
`ketplace positively affects market shares.9
`
`
`
`
`
`IV. Concluding Remarks
`
`
`
`
`
`
`
`
`
`
`
`
`
`We have reported results on factors af-
`
`
`
`
`
`
`fecting the growth and composition of the
`
`
`
`
`
`HZ-antagonist drug market. With an H2-
`
`
`
`
`
`antagonist
`industry own-price elasticity of
`
`
`
`
`
`—0.69 and between-drug price elasticities
`
`
`
`
`
`of —0.66, the implicit brand-specific own-
`
`
`
`
`
`
`
`price elasticities in May 1994 are —0.80 for
`
`
`
`
`
`
`Tagamet (SE = 0.08), — 1.03 (SE = 0.12) for
`
`
`
`
`
`
`
`
`Zantac, —0.76 (SE = 0.08) for Pepcid, and
`
`
`
`
`
`
`—0.74 (SE = 0.08)
`for Axid. Except
`for
`
`
`
`
`
`
`Zantac,
`these elasticity estimates are still
`
`
`
`
`
`
`
`slightly smaller than the — 1.1 to —1.3 val-
`
`
`
`
`
`
`
`ues one might expect based on the Lerner
`
`
`
`
`
`markup rule of thumb; nevertheless they
`
`
`
`
`
`
`
`
`
`are not far from 1, and clearly differ from 0.
`
`
`
`
`
`
`
`It is worth noting that when marketing vari-
`ables are omitted from the relative-demand
`
`
`
`
`
`
`
`
`
`equations, price-elasticity estimates fall to
`about half these values.
`
`
`
`
`
`
`
`
`
`
`We find that marketing information stocks
`
`
`
`
`
`
`
`positively affect sales, that the sales elastic-
`
`
`
`
`
`
`
`
`ity is largest for detailing, followed by jour-
`
`
`
`
`
`
`
`
`nal pages of advertising, and is smallest for
`
`
`
`direct-to-consumer advertising. Marketing
`
`
`
`
`
`
`information appears to display overall de-
`
`
`
`
`
`
`
`
`creasing returns to scale. We also find that
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`9Although DCA is arguably intended to affect indus-
`
`
`
`
`
`
`try demand rather than market shares, when the DCA
`
`
`
`
`
`
`
`
`information variable is added, shares of Tagamet and
`
`
`
`
`
`
`
`Axid were positively affected relative to those of Zan-
`
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`VOL. 85 N0. 2
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`INFORMATION, EDUCA TING, AND MARKETING IN HEAL TH CARE
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`order-of-entry effects are significant, as are
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`quality attributes.
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`LINKED CITATIONS
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`You have printed the following article:
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`Information, Marketing, and Pricing in the U.S. Antiulcer Drug Market
`Ernst R. Berndt; Linda Bui; David R. Reiley; Glen L. Urban
`The American Economic Review, Vol. 85, No. 2, Papers and Proceedings of the Hundredth and
`Seventh Annual Meeting of the American Economic Association Washington, DC, January 6-8,
`1995. (May, 1995), pp. 100-105.
`Stable URL:
`http://links.jstor.org/sici?sici=0002-8282%28199505%2985%3A2%3C100%3AIMAPIT%3E2.0.CO%3B2-5
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`References
`
`Market Share Rewards to Pioneering Brands: An Empirical Analysis and Strategic
`Implications
`Glen L. Urban; Theresa Carter; Steven Gaskin; Zofia Mucha
`Management Science, Vol. 32, No. 6. (Jun., 1986), pp. 645-659.
`Stable URL:
`http://links.jstor.org/sici?sici=0025-1909%28198606%2932%3A6%3C645%3AMSRTPB%3E2.0.CO%3B2-8
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