Abstract: We empirically quantify and characterize informational barriers to entry into the anti-ulcer drug market by studying the diffusion process of the molecule Omeprazole in the first 30 months after it entered the market. Using a novel panel dataset tracking doctors' complete prescription histories, we specify and estimate a learning model in which doctors, initially uncertain about the quality differential between Omeprazole and the incumbent molecules, update their beliefs about this differential from first-hand experience after observing noisy signals from patients to whom they have prescribed the molecule. We find strong evidence that doctors' uncertainty about Omeprazole's quality is resolved by first-hand experience rather than through the pharmaceutical companies' marketing activities, so that learning through first-hand experience explains almost all of Omeprazole's diffusion path over our three-year sample period. This casts some doubt on previous researchers' findings, utilizing aggregate data, regarding the importance of marketing in securing market share for an entrant brand.
Keywords: pharmaceutical industry, barriers to entry, simulated maximum likelihood, diffusion models
JEL Classification: I10;L15;L65;M3