Private versus social incentives for pharmaceutical innovation

Paula González, Ines Macho-Stadler and David Perez-Castrillo

Journal of Health Economics, 2016, vol. 50, issue C, 286-297

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; Innovation (search for similar items in EconPapers)
JEL-codes: I1 L1 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Working Paper: 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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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:50:y:2016:i:c:p:286-297

DOI: 10.1016/j.jhealeco.2015.12.003

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