Innovation and market dynamics in the EPO marketby

Enrico Sorisio[1] and Steinar Strøm[2]

1] PharmaNess scarl; University of Turin[2] University of Oslo; The Frisch Centre, Oslo; University of Turin

The Model

ij ij j j j

ij j j j r ir r r r

ij j j j j j j j ij

(1) U U( ,p , x , , , )

(2) U( ,p , x , , , ) max U( ,p , x , , , )

(3) U( ,p , x , , , ) V (p , x , / , / )

The model

t

jt

kt

kt

;

jrij j ij ir J

kk 1

1t 1tjt jtjt J

1t 1tkt ktk 2

1t J

1t 1tkt ktk 2

for j 2,3, , , J

1

1

(5)

exp(V )(4) P(U max U )

exp(V )

exp( p p * )

exp( p p * )

1(6)exp( p p * )

jt j

jt1t 1tjt jt jt

1t

jt0 1jt

1t

jt

(7) ln p p *

A

A(8)

(9) *

0 j 0 1 jt

j

0 j 0 1 jt

jt jt1t 1tjt jt

1t 1t

jt0 1

e

; ; ; e

A(10) ln (p p ) (p p )

A

ii J

jj 1

i

exp(v ( ) / ); i 1, 2, , , J

exp(v ( ) / )

1lim

J

i j j

ii J J

j ij

j 1 j ì

i i j j

Let v max v

exp(v ( ) / ) 1; i 1,2, , , J

v vexp(v ( ) / ) 1 exp( )

lim 1if v max v

0

j j j j j

j j j j j j j j

where

C c q c M

(11) (p,A, ,M) p M (A, p, ) C (q ) (p c ) M (A,p, )

tjt jt

jt jtjt jt jt jt jt jt

j

1(12) p c ; j 1,2,,, J

(1 ) ( )(1 )p

jjt

jt jtjt

jt

jt jt jt

jtjjt

jtjt jt jt

(14)

Let

then

p c(13) L

p

E (1 ) p

1L

E

1L(1 ) p

jt j 1 r r,t 1 jt

1

(15) L max [L ]

(16) Lˆ1

Quantities sold (kDDD)

0

200

400

600

800

1000

1200

2000

Q 2

2000

Q 3

2000

Q 4

2001

Q 1

2001

Q 2

2001

Q 3

2001

Q 4

2002

Q 1

2002

Q 2

2002

Q 3

2002

Q 4

2003

Q 1

2003

Q 2

2003

Q 3

2003

Q 4

2004

Q 1

2004

Q 2

2004

Q 3

2004

Q 4

2005

Q 1

Aranesp Eprex NeoRecormon

Market shares

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

2000Q 2

2000Q 3

2000Q 4

2001Q 1

2001Q 2

2001Q 3

2001Q 4

2002Q 1

2002Q 2

2002Q 3

2002Q 4

2003Q 1

2003Q 2

2003Q 3

2003Q 4

2004Q 1

2004Q 2

2004Q 3

2004Q 4

Aranesp Eprex NeoRecormon

Deflated Prices (€/DDD)

8,5

9

9,5

10

10,5

11

11,5

12

12,5

2000

Q 2

2000

Q 3

2000

Q 4

2001

Q 1

2001

Q 2

2001

Q 3

2001

Q 4

2002

Q 1

2002

Q 2

2002

Q 3

2002

Q 4

2003

Q 1

2003

Q 2

2003

Q 3

2003

Q 4

2004

Q 1

2004

Q 2

2004

Q 3

2004

Q 4

2005

Q 1

Aranesp Eprex NeoRecormon

Market Value (k€)

0

5000

10000

15000

20000

2000Q 2

2000Q 3

2000Q 4

2001Q 1

2001Q 2

2001Q 3

2001Q 4

2002Q 1

2002Q 2

2002Q 3

2002Q 4

2003Q 1

2003Q 2

2003Q 3

2003Q 4

2004Q 1

2004Q 2

2004Q 3

2004Q 4

2005Q 1

Aranesp Eprex NeoRecormon Tot

Table 2. Estimates of the demand equation

Coefficients

Estimates Std. Err.

t-values.

0 -1.3053 0.3506 -3.7

1 1.8139 0.1136 16.0

R-sq: within = 0.8703between = 0.7902overall = 0.2220

F test that all u_i=0: F(2, 43) =131.62 Prob > F = 0.0000

Fixed effectsNo of observations: 48

Table 3. IV-Estimates of the demand equation

Coefficients

Estimates Std. Err.

t-values.

0 -2.6068 0.8078 -3.2

1 2.0148 0.1791 11.4

Fixed effects

R-sq: within = 0.8727between = 0.7936overall = 0.2229

F test that all u_i=0: F(2, 43) =99.41 Prob > F = 0.0000

No of observations: 48

Own price elasticites

E11t E22t E33t

Average -3.76 -4.49 -17.72

Std dev 1.10 0.61 5.01

Min -5.23 -5.44 -25.23

Max -2.55 -3.80 -11.16

Name Eprex NeoRecormon Aranesp

jtjt 1t 0 j 0 jt 1t 1 jt 1t jt

1t

jt jt jtjt jt

jt jt jt jt

jt

jt tjt

Aln ln (p p ) (p p ) e

A

1p c r

(1 )

f ( , p , ) u

eu MVN(0, )

r

From pdf for (ejt, rjt)

to pdf for (pjt,φjt)

Table 5. Estimates of evolution of market power in the Nordic markets for EPO

Coefficients

Countries

Denmark Finland

Estimates Std err t-valuesEstimat

esStd err t-values

1 0.1895 0.1035 1.8 0.1964 0.1703 1.2

i (constant)

0.1339 0.041 3.3 0.1419 0.0653 2.2

Long-run 0.1652 - - 0.1765 - -

Coefficients

Norway Sweden

Estimates Std err t-valuesEstimat

esStd err t-values

1 0.1985 0.0737 2.7 0.2236 0.0916 2.4

i

(constant)0.1518 0.0402 3.8 0.1340 0.0315 4.3

Long-run 0.1894 - - 0.1726 - -

Table 6. Estimates of market power (all countries together)

 Coefficients

All countries together

  Estimates Std err t-values

λ1 0.2453 0.1296 1.9

λj

(constant)

0.122 0.0408 3.0

Long-run 0.1617 - -

Lerner indexes - All countries

0,0000

0,0500

0,1000

0,1500

0,2000

0,2500

0,3000

0,3500

0,4000

2000

Q 2

2000

Q 3

2000

Q 4

2001

Q 1

2001

Q 2

2001

Q 3

2001

Q 4

2002

Q 1

2002

Q 2

2002

Q 3

2002

Q 4

2003

Q 1

2003

Q 2

2003

Q 3

2003

Q 4

2004

Q 1

2004

Q 2

2004

Q 3

2004

Q 4

2005

Q 1

Aranesp Eprex NeoRecormon

t

t r irt rt rt rt jt

t t 1

J

j 1

(19) E U( ,p , x , , ); r] ]

and

E(CS) E(CS) E(CS)

[CS] E[max [ln exp V C

t

t

t r irt rt rt rt jt

tjt jt

jtjt

J

j 1

J

j 1

U( ,p , x , , , ); r] ]

and

1exp(V )

V

E[CS] E[max [ln exp V C

E[CS]

exp V

t

tjt jt jt jt

jtjt

tjt

t

jt jt t jt

J

j 1

1exp(V )( )

p

( )y

V (y p )

E[CS]

exp V

E[CS]

t

jtjt

t

t

E[CS ]

p

E[CS ]

y

Estimated Consumer Surplus

0

400000

800000

1200000

1600000

2000000

2400000

2000

Q 2

2000

Q 3

2000

Q 4

2001

Q 1

2001

Q 2

2001

Q 3

2001

Q 4

2002

Q 1

2002

Q 2

2002

Q 3

2002

Q 4

2003

Q 1

2003

Q 2

2003

Q 3

2003

Q 4

2004

Q 1

2004

Q 2

2004

Q 3

2004

Q 4

2005

Q 1

tot. E(CS) Poli. (tot. E(CS) )

jkt jkt jkt jkt

3 4

t jktj 1 k 1

(20) E(PS ) L p ddd

(21) E(PS ) E(PS )

Surplus variation

0

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

7.000.000

2000

Q 2

2000

Q 3

2000

Q 4

2001

Q 1

2001

Q 2

2001

Q 3

2001

Q 4

2002

Q 1

2002

Q 2

2002

Q 3

2002

Q 4

2003

Q 1

2003

Q 2

2003

Q 3

2003

Q 4

2004

Q 1

2004

Q 2

2004

Q 3

2004

Q 4

2005

Q 1

tot. E(CS) tot. E(PS) Total surplus

Poli. (tot. E(CS)) Poli. (tot. E(PS)) Poli. (Total surplus)