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Market Size and Pharmaceutical Innovation

Pierre Dubois (), Olivier de Mouzon, Fiona Scott Morton and Paul Seabright

No 670, IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: This paper quantifies the relationship between market size and innovation in the pharmaceutical industry using improved, and newer, methods and data. We find positive significant elasticities of innovation to expected market size with a point estimate under our preferred specification of 0.23. This suggests that, on average, $2.5 billion is required in additional revenue to support the invention of one new chemical entity. This magnitude is plausible given recent accounting estimates of the cost of innovation of 800 million to one billion per drug, and marginal costs of manufacture and distribution near 50%. An elasticity below 1 is also a plausible implication of the hypothesis that innovation in pharmaceuticals is becoming more difficult over time, as costs of regulatory approval rise and as the industry runs out of "low-hanging fruit".

Keywords: Innovation; Market Size; Elasticity; Pharmaceuticals (search for similar items in EconPapers)
JEL-codes: O31 L65 O34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-cse, nep-hea, nep-ind, nep-ino, nep-ipr, nep-pr~ and nep-tid
Date: 2011-04, Revised 2014-03
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Published in The RAND Journal of Economics, vol. 46, n°4, Winter 2015, p. 844-871.

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http://idei.fr/sites/default/files/medias/doc/by/dubois/dmss.pdf Full text (application/pdf)

Related works:
Journal Article: Market size and pharmaceutical innovation (2015) Downloads
Working Paper: Market Size and Pharmaceutical Innovation (2014) Downloads
Working Paper: Market Size and Pharmaceutical Innovation (2011) Downloads
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