Entry and Investment Decisions in the Pharmaceutical Industry

The pharmaceutical industry is different from most industries where entry has been studied as it involves a time intensive research process with most of the interesting dynamics and firm interactions occurring pre-launch. This paper asks the question: do firms respond to the actions of their competitors in the R&D stages? Measuring the impact of competition on firms’ investment decisions has significant implications on the impact of a faster FDA approval process something most pharmaceutical companies are pushing for. While a faster approval process incentivizes firms to invest in disease markets due to the quicker realization of profits it also intensifies competition. Which effect dominates depends on the degree of competition. To this end, I first estimate a dynamic entry and investment model while accounting for firm interactions and market heterogeneity using a panel dataset on firm entry and exit decisions at the research phase level in various markets. I then solve for the equilibrium firm responses under the counterfactual of a faster FDA approval process. ∗All comments are welcome. I would like to thank Wesley Hartmann, Harikesh Nair, Sridhar Narayanan, participants of the Stanford GSB Marketing Seminar, Stanford IO Structural Lunch and the 2012 Marketing Science Conference for their valuable suggestions and feedback. All errors are my own. Correspondence: The University of Chicago, Booth School of Business, Chicago, IL 60637. Email: [email protected].