Promotion Spillovers under Product Bundling

What is it about?

This paper examines the spillover effects of promotions when products from different firms are consumed in a bundle. Using data from the HIV/AIDS category, a canonical example of combination therapy, we estimate a hierarchical Bayesian logit model across treatment regimens and show that detailing for one drug can increase demand for other drugs that are often combined with the focal drug. Such spillover effects could lead to free riding by the drugs benefitting from the spillover. We investigate the managerial and policy implications of detailing spillover effects via counterfactual policy simulations based on a dynamic oligopoly game of detailing.

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Why is it important?

This research has important mangerial and policy implications. For managers, we show how firms can internalize the spillover effects and reduce the incentive for free riding. For policy makers, the implications of our findings relate to detailing restrictions that are often proposed on branded drugs. These restrictions aim to increase social welfare by encouraging the use of generic drugs. However, in combination therapies generic drugs may actually benefit from the detailing of complementary branded products. If detailing was curtailed, this may adversely affect prescriptions of the generic drugs as well which runs counter to policy makers’ objectives of encouraging usage of generic drugs.