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Private versus Social Incentives for Pharmaceutical Innovation

Author

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  • Paula González
  • Ines Macho-Stadler
  • David Pérez-Castrillo

Abstract

We provide a theoretical framework to contribute to the current debate regarding the tendency of pharmaceutical companies to direct their R&D toward marketing products that are “follow-on” drugs of already existing drugs, rather than toward the development of breakthrough drugs. We construct a model with a population of patients who can be treated with drugs that are horizontally and vertically differentiated. In addition to a pioneering drug, a new drug can be marketed as the result of an innovative process. We analyze physician prescription choices and the optimal pricing decision of an innovative .rm. We also characterize the incentives of the in-novative firm to conduct R&D activities, disentangling the quest for breakthrough drugs from the firm effort to develop follow-on drugs. Our results offer theoretical support for the conventional wisdom that pharmaceutical firms devote too many resources to conducting R&D activities that lead to incremental innovations.

Suggested Citation

  • Paula González & Ines Macho-Stadler & David Pérez-Castrillo, 2015. "Private versus Social Incentives for Pharmaceutical Innovation," CESifo Working Paper Series 5672, CESifo.
    • Handle: RePEc:ces:ceswps:_5672
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    References listed on IDEAS

    as
    1. Bardey, D. & Bommier, A. & Jullien, B., 2010. "Retail price regulation and innovation: Reference pricing in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 29(2), pages 303-316, March.
    2. Ernst Berndt & Murray Aitken, 2011. "Brand Loyalty, Generic Entry and Price Competition in Pharmaceuticals in the Quarter Century after the 1984 Waxman-Hatch Legislation," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 18(2), pages 177-201.
    3. Juan-José Ganuza & Gerard Llobet & Beatriz Domínguez, 2009. "R& D in the Pharmaceutical Industry: A World of Small Innovations," Management Science, INFORMS, vol. 55(4), pages 539-551, April.
    4. Karan Girotra & Christian Terwiesch & Karl T. Ulrich, 2007. "Valuing R& D Projects in a Portfolio: Evidence from the Pharmaceutical Industry," Management Science, INFORMS, vol. 53(9), pages 1452-1466, September.
    5. Jasjit Singh & Lee Fleming, 2010. "Lone Inventors as Sources of Breakthroughs: Myth or Reality?," Management Science, INFORMS, vol. 56(1), pages 41-56, January.
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    Citations

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    Cited by:

    1. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2022. "The price of cost-effectiveness thresholds," NIPE Working Papers 5/2022, NIPE - Universidade do Minho.
    2. Bardey, David & Cremer, Helmuth & Lozachmeur, Jean-Marie, 2016. "The design of insurance coverage for medical products under imperfect competition," Journal of Public Economics, Elsevier, vol. 137(C), pages 28-37.
    3. Jullien, Bruno & Lefouili, Yassine, 2018. "Horizontal Mergers and Innovation," CEPR Discussion Papers 12773, C.E.P.R. Discussion Papers.
    4. Marie‐Louise Leroux & Gregory Ponthiere, 2020. "Nursing home choice, family bargaining, and optimal policy in a Hotelling economy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(4), pages 899-932, August.
    5. Francesca Barigozzi & Izabela Jelovac, 2020. "Research funding and price negotiation for new drugs," Health Economics, John Wiley & Sons, Ltd., vol. 29(S1), pages 83-96, October.
    6. Patrick Leoni & Alvaro Sandroni, 2016. "Can patent duration hinder medical innovation," International Journal of Health Economics and Management, Springer, vol. 16(4), pages 397-406, December.
    7. Brekke, Kurt R. & Dalen, Dag Morten & Straume, Odd Rune, 2025. "Competition matters: uniform vs. indication-based pricing of pharmaceuticals," Discussion Paper Series in Economics 1/2025, Norwegian School of Economics, Department of Economics.
    8. Bingqiang Li & Lei Huang, 2019. "The Effect of Incremental Innovation and Disruptive Innovation on the Sustainable Development of Manufacturing in China," SAGE Open, , vol. 9(1), pages 21582440198, February.
    9. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2024. "Competing with precision: incentives for developing predictive biomarker tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(1), pages 60-97, January.
    10. Brekke, Kurt R. & Dalen, Dag Morten & Straume, Odd Rune, 2022. "Paying for pharmaceuticals: uniform pricing versus two-part tariffs," Journal of Health Economics, Elsevier, vol. 83(C).
    11. Kurt R. Brekke & Odd Rune Straume & Dag Morten Dalen, 2023. "Taking the competitor´s pill: when combination therapies enter pharmaceutical markets," NIPE Working Papers 12/2023, NIPE - Universidade do Minho.
    12. Jelena Grujić & Slobodan Morača & Angela Fajsi, 2020. "Analysis of Risk Factors in the Channels of Drug Distribution: Professional Perspectives," Sustainability, MDPI, vol. 12(11), pages 1-20, June.
    13. Brekke, Kurt R. & Dalen, Dag Morten & Straume, Odd Rune, 2023. "The price of cost-effectiveness thresholds under therapeutic competition in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 90(C).
    14. Le, Son & Sukhatme, Neel U., 2020. "Reaching for mediocrity: Competition and stagnation in pharmaceutical innovation," International Review of Law and Economics, Elsevier, vol. 64(C).
    15. Straume, Odd Rune, 2023. "Therapeutic reference pricing and drug innovation incentives," Economics Letters, Elsevier, vol. 222(C).

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    More about this item

    Keywords

    pharmaceuticals; R&D activities; me-too drugs; breakthrough drugs; incremental innovation; radical innovation;
    All these keywords.

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General

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