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Innovation and Market Structure in Pharmaceuticals: An Econometric Analysis on Simulated Data

Author

Listed:
  • Garavaglia Christian

    (DEMS,University of Milano-Bicocca)

  • Malerba Franco

    (CRIOS, Bocconi University)

  • Orsenigo Luigi

    (CRIOS, Bocconi University)

  • Pezzoni Michele

    (CRIOS, Bocconi University)

Abstract

The contribution of this paper is twofold. First, it presents the results of a “history-friendly” simulation model of evolution of the pharmaceutical industry. Second, it aims at contributing to a more general methodological discussion about agent-based models by proposing an econometric analysis of the results of the simulations. The case of the pharmaceutical industry has been studied extensively by scholars because, despite the high level of R&D intensity, the industry has been characterized by a relatively low levels of concentration. The model is able to reproduce the main stylized facts of the industry in an evolutionary perspective. In this paper we extend the analysis conducted in two previous works (Garavaglia et al. 2012, 2013) by further qualifying the findings with an extensive econometric investigation of the model outputs. The paper focuses the attention on the determinants of market structure, the innovative performance of the industry, the diversification in multiple submarkets and the level of prices. We find that the properties of the technological and demand regimes are key determinants of the patterns of industry evolution and that the main mechanisms driving the model are the random processes of search, the discovery of new submarkets as well as the interactions between patent protection, imitation and price competition. In addition, this paper emphasizes how the emerging leaders in the industry are those innovative early entrants which entered in large submarkets, showing the importance of the first mover advantage and of the size of the “prize” accruing to innovators when they discover a new rich submarket.

Suggested Citation

  • Garavaglia Christian & Malerba Franco & Orsenigo Luigi & Pezzoni Michele, 2014. "Innovation and Market Structure in Pharmaceuticals: An Econometric Analysis on Simulated Data," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 234(2-3), pages 274-298, April.
    • Handle: RePEc:jns:jbstat:v:234:y:2014:i:2-3:p:274-298
    DOI: 10.1515/jbnst-2014-2-310
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    1. Franco Malerba & Richard Nelson & Luigi Orsenigo & Sidney Winter, 2008. "Vertical integration and disintegration of computer firms: a history-friendly model of the coevolution of the computer and semiconductor industries," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 17(2), pages 197-231, April.
    2. Franco Malerba & Luigi Orsenigo, 2002. "Innovation and market structure in the dynamics of the pharmaceutical industry and biotechnology: towards a history-friendly model," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 11(4), pages 667-703, August.
    3. Christian Garavaglia & Franco Malerba & Luigi Orsenigo & Michele Pezzoni, 2013. "A Simulation Model of the Evolution of the Pharmaceutical Industry: A History-Friendly Model," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 16(4), pages 1-5.
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