Industry Dynamics in Pharmaceuticals

Abstract

Pharmaceuticals is a relatively large and mature industry, and of growing significance. The industry has stimulated extensive research on determinants of its growth and development. Specifically, the distribution of firm size has attracted significant attention, due to tis relevance as an indicator of degree of industrial concentration. A large part of this literature has focused, since the early contributions, on the explanation of the shape of firm size distribution in the industry at a given point in time by reference to steady state arguments. The dynamics in question have been relatively neglected however. The main objective of this paper is to help fill this gap. It is shown that interesting issues arise when one considers how firm structure evolves over time, rather than simply attending to equilibrium implications of processes. Information on the shape and time-evolution of the size distribution of firms over an extended period of time can be used to make inferences about an underlying process; specifically, on which characteristics lead to which kinds of dynamics. To that end, we propose a diffusion model to examine the spatial dynamics of firm size. Instead of assuming a steady state as is standard practice, we consider that firm size fluctuates around its long run stationary equilibrium, according to a double process of temporal drift and random disturbance. An empirical application to real data from the Pharmaceutical industry helps fill a second gap in the literature, as only a few diffusion studies have employed real statistical data when analyzing firm size dynamics. Our empirical application confirms results presented elsewhere and offers some new insights.