Markets for Pharmaceutical Products11The authors thank Tom McGuire for editorial advice and improvements and participants at the Handbook conference for helpful suggestions

This chapter describes the market for pharmaceuticals, which exceeded $500 million in sales in 2010. The industry is also characterized by extensive regulation of almost every activity, from product development through manufacturing and marketing, which we summarize. We next describe the industry's market structure. Large, fully integrated, multinational firms that develop and market new drugs have historically dominated the industry, but the emergence of smaller firms focused on the application of biotechnology to drug development as well as firms that specialize in low-cost production of off-patent “generic†drugs has had an important impact on the market structure of the industry. The last two decades have seen a shift towards vertical specialization as well as many horizontal mergers. We discuss trends in the productivity of pharmaceutical research and incentives for innovation. We then summarize the pricing and marketing of drugs in the US and several other countries.