Productivity, Prices and Market Shares in Multiproduct Firms

Abstract:

We examine the determinants of product market shares in the Indian pharmaceutical industry featuring multiproduct firms. Using detailed data on firm-level financial information coupled with product-level sales and wholesale prices, we find that in narrowly defined homogeneous product markets, products sold at higher wholesale prices have a higher market share. We estimate a reduced form model of product market share that controls for wholesaler prices as well as the role of consumers and intermediaries. To disentangle the demand- and supply-side effects of price on market shares we estimate product-level productivity, controlling for the biases related to input measurement, simultaneity, and product scope. We find that product prices are correlated negatively with quantity-based productivity and positively with revenue-based productivity. We use quantity-based productivity measures to instrument for product wholesale price and find that an increase in wholesale price stemming from the supply side affects market share negatively. Retail margins and product appeal drive market share upward, suggesting that the observed positive correlation between price and market share is mainly due to demand-related features, involving retailer buyer power and uninformed consumers.