Pharmaceutical Patents: Incentives for Research and Development or Marketing?
AbstractWe analyze how a patent-holding pharmaceutical firm may strategically use advertising of existing drugs to affect research and development (R&D) investments in new (differentiated) drugs, and thereby affect the probability distribution of future market structures in the industry. Within a fairly general model framework, we derive exact conditions for advertising and R&D being substitute strategies for the incumbent firm and show that it may overinvest in advertising to reduce the incentive for an entrant to invest in R&D, thereby reducing the probability of a new product on the market. In a more specific setting of informative advertising, we show that such overinvestment incentives are always present and that more generous patent protection implies that a larger share of the patent rent is spent on marketing, relative to R&D.
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Bibliographic InfoArticle provided by Southern Economic Association in its journal Southern Economic Journal.
Volume (Year): 76 (2009)
Issue (Month): 2 (October)
Find related papers by JEL classification:
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
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- Brekke, Kurt R. & Holmas, Tor Helge & Straume, Odd Rune, 2011.
"Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment,"
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- Grossmann, Volker, 2013.
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- Volker Grossmann, 2011. "Do Cost-sharing and Entry Deregulation Curb Pharmaceutical Innovation?," CESifo Working Paper Series 3439, CESifo Group Munich.
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