Product Line Extensions Under the Threat of Entry: Evidence from the UK Pharmaceuticals Market

Abstract

Do firms increase product lines to deter entry and, if so, when is such a strategy successful? We use data from the UK pharmaceuticals to examine how incumbents respond to change in the threat of entry. In line with the entry deterrence motive, originators' product launch rate is higher when the risk of entry is moderate, but becomes lower when entry is very likely, and the effect is most pronounced in medium size markets. We further find that in medium size markets, originators can deny entry via proliferation if they fill the product space evenly across patients so that each variant has a significant market share of the originators drugs. This does not work in large markets, but here entry is deterred when originators engage in product hopping, i.e., shift most of the patients to newer variants of the drug that may still be protected by intellectual property.