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R& D in the Pharmaceutical Industry: A World of Small Innovations

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  • Juan-José Ganuza

    ()
    (Department of Economics, Universitat Pompeu Fabra, 08005 Barcelona, Spain)

  • Gerard Llobet

    ()
    (Centro de Estudios Monetarios y Financieros (CEMFI), 28014 Madrid, Spain)

  • Beatriz Domínguez

    ()
    (BBVA, 28046 Madrid, Spain)

Abstract

It is commonly argued that in recent years pharmaceutical companies have targeted their research and development (R& D) at small improvements of existing compounds instead of riskier drastic innovations. In this paper, we show that the bias in the pharmaceutical industry toward small innovations might be driven by the low sensitivity of the demand. In particular, small innovations get a proportionally larger reward because pharmaceutical firms target them at the inelastic segments of the demand. As a consequence, firms find it relatively more profitable to invest in small innovations. We also study the effect on R& D incentives of marketing strategies and regulatory instruments aimed at controlling pharmaceutical expenditure.

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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 55 (2009)
Issue (Month): 4 (April)
Pages: 539-551

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Handle: RePEc:inm:ormnsc:v:55:y:2009:i:4:p:539-551

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Keywords: health care; pharmaceuticals; innovation; marketing;

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References

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Citations

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Cited by:
  1. Fumagalli, Chiara & Motta, Massimo & Rønde, Thomas, 2009. "Exclusive dealing: the interaction between foreclosure and investment promotion," CEPR Discussion Papers 7240, C.E.P.R. Discussion Papers.
  2. Antonio Cabrales & Sergi Jiménez-Martín, 2007. "The determinants of pricing in pharmaceuticals: Are U.S. prices really higher than those of Canada?," Economics Working Papers 1032, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Jose Ceron & Javier Suarez, 2006. "Hot And Cold Housing Markets: International Evidence," Working Papers wp2006_0603, CEMFI.
  4. Javier Diaz-Gimenez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms in the U.S.: a Boon for the Income Poor," Computing in Economics and Finance 2006 400, Society for Computational Economics.
  5. Beatriz Domínguez & Juan José Ganuza & Gerard Llobet, 2005. "R&D in the pharmaceutical industry: A world of small innovations," Economics Working Papers 936, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Antonio Cabrales & Sergi Jiménez‐Martín, 2013. "The Determinants Of Pricing In Pharmaceuticals: Are Us Prices Really So High?," Health Economics, John Wiley & Sons, Ltd., vol. 22(11), pages 1377-1397, November.
  7. de Frutos, Maria-Angeles & Ornaghi, Carmine & Siotis, Georges, 2013. "Competition in the pharmaceutical industry: How do quality differences shape advertising strategies?," Journal of Health Economics, Elsevier, vol. 32(1), pages 268-285.
  8. Pedro Pita Barros & Xavier Martinez-Giralt, 2006. "On insurance and the cost-sharing of pharmaceutical R&D," Working Papers 293, Barcelona Graduate School of Economics.

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