Private versus Social Incentives for Pharmaceutical Innovation

Paula González, David Pérez-Castrillo and Ines Macho-Stadler
Authors registered in the RePEc Author Service: David Perez-Castrillo and Paula González

No 860, Working Papers from Barcelona School of Economics

Abstract: We provide a theoretical framework to contribute to the current debate regarding the tendency of pharmaceutical companies to direct their R&D toward marketing products that are “follow-on” drugs of already existing drugs, rather than toward the development of breakthrough drugs. We construct a model with a population of patients who can be treated with drugs that are horizontally and vertically differentiated. In addition to a pioneering drug, a new drug can be marketed as the result of an innovative process. We analyze physician prescription choices and the optimal pricing decision of an innovative …firm. We also characterize the incentives of the innovative firm to conduct R&D activities, disentangling the quest for breakthrough drugs from the firm effort to develop follow-on drugs. Our results offer theoretical support for the conventional wisdom that pharmaceutical firms devote too many resources to conducting R&D activities that lead to incremental innovations.

Keywords: pharmaceuticals; R&D activities; me-too drugs; breakthrough drugs; incremental innovation; radical innovation (search for similar items in EconPapers)
JEL-codes: H51 I11 I18 O31 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-com, nep-hea, nep-ino, nep-mic and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Private versus social incentives for pharmaceutical innovation (2016)
Working Paper: Private versus Social Incentives for Pharmaceutical Innovation (2015)
Working Paper: Private versus Social Incentives for Pharmaceutical Innovation (2015)
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