When Is Prevention More Profitable than Cure? The Impact of Time-Varying Consumer Heterogeneity - Working Paper 334

Michael Kremer () and Christopher Snyder
Authors registered in the RePEc Author Service: Christopher Mark Snyder

No 334, Working Papers from Center for Global Development

Abstract: We argue that in pharmaceutical markets, variation in the arrival time of consumer heterogeneity creates differences between a producer’s ability to extract consumer surplus with preventives and treatments, potentially distorting R&D decisions. If consumers vary only in disease risk, revenue from treatments—sold after the disease is contracted, when disease risk is no longer a source of private information—always exceeds revenue from preventives. The revenue ratio can be arbitrarily high for sufficiently skewed distributions of disease risk. Under some circumstances, heterogeneity in harm from a disease, learned after a disease is contracted, can lead revenue from a treatment to exceed revenue from a preventative. Calibrations suggest that skewness in the U.S. distribution of HIV risk would lead firms to earn only half the revenue from a vaccine as from a drug. Empirical tests are consistent with the predictions of the model that vaccines are less likely to be developed for diseases with substantial disease-risk heterogeneity.

Keywords: prevention; pharmaceutical companies; HIV (search for similar items in EconPapers)
JEL-codes: D42 I18 L11 O31 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-07
New Economics Papers: this item is included in nep-hea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:cgd:wpaper:334

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