Pharmaceutical Patents: Incentives for Research and Development or Marketing?

Kurt Brekke () and Odd Rune Straume

Southern Economic Journal, 2009, vol. 76, issue 2, 351-374

Abstract: We analyze how a patent‐holding pharmaceutical firm may strategically use advertising of existing drugs to affect research and development (R&D) investments in new (differentiated) drugs, and thereby affect the probability distribution of future market structures in the industry. Within a fairly general model framework, we derive exact conditions for advertising and R&D being substitute strategies for the incumbent firm and show that it may overinvest in advertising to reduce the incentive for an entrant to invest in R&D, thereby reducing the probability of a new product on the market. In a more specific setting of informative advertising, we show that such overinvestment incentives are always present and that more generous patent protection implies that a larger share of the patent rent is spent on marketing, relative to R&D.

Date: 2009
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https://doi.org/10.4284/sej.2009.76.2.351

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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:76:y:2009:i:2:p:351-374

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