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Pharma’s first-to-market advantage explained by network effects

Source: https://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights/pharmas-first-to-market-advantage

According to a McKinsey study, there is a weak first-to-market advantage on average in the pharmaceutical industry, but with significant nuances dependent on market context. The study showed that first-in-class players on average achieve a greater-than-fair market share. In addition, first-to-market players have a 6% market-share advantage over later entrants, yet the first-to-market advantage is highly dependent on several market contexts. Based on the analysis, prescriber characteristics, route of administration, and competitive dynamics also affect the strength of the first-mover advantage. In summary, the study suggests that the first-mover advantage can be formidable in the right circumstances but it’s not insurmountable.

This relates to the class material covering network effects. With many products that use network effects, it is likely that one product will dominate the market, as opposed to a scenario in which both products flourish, especially with OTC drugs where a person’s inclination to buy a drug is heavily reliant on what is widely adopted. The product that first gets over its own tipping point attracts many consumers and this may make competitors less attractive. Being the first to reach the tipping point may be better than being the best in quality. For instance, if drug A has customer base z, then consumer x values it at rA(x)f(z), while if product B has an audience size z, then consumer x values it at rB(x)f(z). If rB(x)f(z) is greater than rA(x)f(z), this implies that product B is a better product than A. However, if product A is in the market first and gets over the tipping point (denoted as z’ in lecture) first, then product B may not be able to survive. According to Brian Arthur, the “hallmarks” of markets with strong network effects are market instability, multiple potential outcomes, unpredictability, the ability to lock in a market, the possible predominance of an inferior product, and fat profits for the winner. Although all these hallmarks may not appear in every market with strong network effects, these hallmarks are worth watching for markets with network effects, such as the pharma industry.

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