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Article Excerpt
We study three determinants of the levels of price and detailing effort across geographic markets: the within-market response to each variable, the nature of interfirm strategic interactions both within that market and across markets. We empirically examine the interactions of Prozac, Zoloft, and Paxil across the United States, the United Kingdom, Germany, France, and Italy. Our results indicate that all three factors driving marketing mix interactions are at play in this product category. The U.S. market is less price-sensitive than the European markets. Detailing elasticities are comparable across the United States, Germany, and Italy, while the United Kingdom and France show greater elasticity. For the U.S. market, we find that almost all deviations from Nash pricing and detailing levels are due to within-market interactions. In the U.K. market, deviations from Nash prices come about due mostly to across-market interactions--both with the United States as well as the rest of Europe, whereas deviations from Nash detailing levels are mainly due to across-market interactions with the United States. For Italy, we observe that both within and across-market interactions affect price and detailing levels. Overall, the pattern of interactions makes observed prices more similar across countries than prices implied by the estimated elasticities. This underscores the importance of considering within- and across-market interactions in developing multimarket strategy.
Key words: marketing strategy; international marketing; competition
History: This paper was received June 20, 2001, and was with the authors 7 months for 3 revisions; processed by Scott A. Neslin.
Introduction
The issue of global versus local marketing strategies has long occupied the attention of international marketers. Which of these two approaches (or the numerous hybrid strategies in between) should a company adopt? The answer to this complex question depends on many factors. In this paper we argue that when determining its marketing mix strategy, a firm needs to consider the following three issues: (1) the heterogeneity of aggregate market response across markets or regions, (2) the role of across-market strategic interactions when the same firms compete with each other in several distinct markets, and (3) the role of within-market strategic interactions among the firms in any given geographic market.
On one hand, variance in response to marketing mix activities can have important implications, leading to differentiated offerings and targeted marketing efforts. Essentially, heterogeneity in market response favors the local (or the regional) approach. On the other hand, empirical evidence suggests that when companies compete with each other in multiple markets, the level of competitiveness is softened (e.g., Parker and Roller 1997, Shankar 1999). This could imply, for instance, that price competition will be less severe and the levels of marketing effort expended will be less than those under noncooperative behavior. For example, consider two firms competing with each other in two distinct regions of the world, and let the market in one region be more price sensitive than in the other. Adopting a regional strategy, companies may price more aggressively in the more price-sensitive region; however, the fear of reprisal in the less price-sensitive market may temper such aggressiveness. The net result may be a strategy that is "global"--less aggressive pricing in all markets (see Bernheim and Whinston 1990 for a theoretical analysis).
When studying competitive interactions among firms across markets, it is also important to account for the nature of the firms' strategic interactions within those markets. Measuring across-market interactions without properly accounting for within-market interactions could result in erroneously attributing the estimated strategic interactions to effects of across-market interactions, when in reality they are a reflection of how firms interact within specific markets.
In this paper we empirically explore the above three factors by examining 12 years of data from five major geographic markets: the United States, the United Kingdom, Germany, France, and Italy--on the marketing mix interactions of three brands in the SSRI (1) subcategory of the antidepressant market. We consider Prozac, Zoloft, and Paxil, which are the main competitors in this market. In our context, across-market interactions refer to interactions of these brands across the five geographic markets. (2) The strategic variables we focus on are price and detailing. Our analysis is intended as a starting point for academics and practitioners who are contemplating the global marketplace.
More specifically, on the demand side we estimate the response of brand sales to marketing mix activities in each geographic market. The elasticity estimates obtained enable us to identify heterogeneity across markets in their responsiveness to marketing activities. On the supply side we study the strategic pricing and detailing behavior of firms across markets. We assume that each firm maximizes profits from its brand across all geographic markets. (3) We assume that the pricing and detailing behavior within a market depends not only on the nature of demand but also on two sets of interactions: (1) the nature of interfirm interactions within that market, and (2) the nature of these interactions across markets. We then estimate both sets of interactions from the data to determine which of the two, if any, has an impact on the strategic behavior of firms. Each firm sets its price and detailing levels accounting for the market response and the behavior of the other firms.
Section 2 discusses the drivers of pharmaceutical pricing across markets with implications for our empirical analysis. Section 3 reviews the relevant empirical research on pricing and detailing in pharmaceutical markets. We then discuss our model, the data, and estimation-related issues. Results of our analysis are in the penultimate section, and the final section concludes the paper.
Pricing in Pharmaceutical Markets and Empirical Implications
The pharmaceutical market is driven by the five Ps: pharmaceutical companies, payers (e.g., insurance firms), providers, patients, and public policy. Pricing in this market tends to be extremely complex. Firms base their pricing decisions on the therapeutic benefits provided to patients, competitive pressures, internal objectives, and government regulation (Kolassa 1997). The extent to which each of these factors influences prices varies across products and geographic markets. While incorporating all these factors is beyond the scope of this paper, it is important to check whether the analysis can account for the effects of these factors.
1. The End Consumer Seldom Pays for the Product, So Why Are Prices Relevant?
Prices set by firms influence organizations such as HMOs (in the U.S. market), which determine the approved list of drugs to be prescribed by affiliated doctors ("formularies"). (4) Hence, they influence doctors' prescribing behavior, thereby affecting demand. We do not have information on any price agreements between HMOs and pharmaceutical firms because we observe only average prices charged by manufacturers in the market. In the estimation of our demand function, we treat the effects of such organizations as unobserved influences on the demand for each of the products considered; and we allow these unobserved factors to be correlated with the observed prices. In this way, we account for the influence of such agencies on the sales and prices of the products while estimating the influence of market prices on aggregate demand.
2. Do Firms Use Price as a Strategic Variable?
While there is little argument that firms use detailing as a strategic variable (to build awareness for the product and to influence physicians' prescription behavior), there is considerable evidence that indicates that the same is true for price. Firms have used skimming, penetration, and parity pricing strategies for drugs. For instance, Prilosec (the first proton pump inhibitor) was launched at a substantial premium to existing H2 antagonists. In contrast, Prevacid (TAP's later entry) was launched at a 10% discount to Prilosec; similarly, Sandoz launched Lescol (a cholesterol medication) at half the price of Mevacor (Merck's market leader) and got a significant share of the market. Next, Claritin and Accupril (ACE inhibitor) were priced at parity with the market leaders at launch. These examples suggest that price is indeed a strategic variable in pharmaceutical markets.
3. Regulatory Authorities in Europe Have a Greater Influence Over Pricing Decisions
The United Kingdom and Germany are not highly regulated, whereas France and Italy are (Danzon and Chao 2000). There are several different forms of regulation. France, Italy, and Spain use direct price regulation, where government approval is required for the pricing of new products. France sets a manufacturer-specific budget or revenue growth limit that the government negotiates with each manufacturer. Germany, Holland, and Denmark use reference price limits, where a single reimbursement price is set on drugs grouped into a therapeutic cluster. In the United Kingdom, there is rate of return regulation. (5) Governments also use cross-market reference pricing based on prices charged in other countries.
Mitigating the above factors are the following: (a) The United Kingdom allows pricing flexibility, and products are typically introduced first in the U.K. market before other European markets (see Table 2), leading to cross-referencing effects; (b) while governments often use generics to drive down the prices of branded products, in the subcategory data we analyze there is no generic competition; and (c) prices change over time differently for different firms. With these factors in mind, we now outline our expectations regarding the three determinants of pricing:
Market Response. First, the downward pressures on price seem greater in the European market because of the governments' active role there. Further, in the product category we study (i.e., antidepressants), Europeans (particularly Germans) have long used less expensive alternative medications such as St. John's Wort to combat depression. These factors suggest that the European market is likely to be more price sensitive than the U.S. market.
Within-Market Interactions. For pharmaceutical products, the U.S. market is larger than the European market (Table 1) and contributes more to firm profits. This, combined with lower price sensitivity as described above, could motivate firms to be less aggressive on pricing in the U.S. market. Note, however, that in other product categories, firms such as Merck (Vasotec) and Sandoz (Lescol) have successfully resorted to penetration pricing (rather than cooperative pricing) strategies in the U.S. market. Such contrasting forces are likely to apply even in Europe: The higher price sensitivity in Europe may result in aggressive pricing. However, the higher external pressure to lower prices may give firms a greater incentive to price "cooperatively." Our empirical approach allows us to distinguish a range of within-market interactions among firms, varying from cooperative to aggressive...
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