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American Economic Journal: Microeconomics: Vol. 3 No. 1 (February 2011)

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

Article Citation

Ellison, Glenn, and Sara Fisher Ellison. 2011. "Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration." American Economic Journal: Microeconomics, 3(1): 1-36.

DOI: 10.1257/mic.3.1.1

Abstract

This paper develops a new approach to testing for strategic entry deterrence and applies it to the behavior of pharmaceutical incumbents before patent expiration. It examines a cross section of markets, determining whether behavior is nonmonotonic in market size. Under some conditions, investment levels will be monotone in market size if firms do not invest to deter entry. Strategic investments to deter entry, however, may result in nonmonotonic investment because they are unnecessary in small markets, and impossible in large ones. Consistent with an entry-deterrence motivation is the finding that incumbents in medium-sized markets advertise less prior to patent expiration. (JEL D92, G31, L11, L21, L65)

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Authors

Ellison, Glenn (MIT)
Ellison, Sara Fisher (MIT)

JEL Classifications

D92: Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L21: Business Objectives of the Firm
L65: Chemicals; Rubber; Drugs; Biotechnology

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