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Incentives for clinical trials

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  • Erik Gronqvist
  • Douglas Lundin

Abstract

It is often argued that drug companies do not wish to carry out post-approval head-to-head clinical trials, since their drugs may be revealed as being no better than existing drugs. However, we show that standard models for vertical differentiation predicts that pharmaceutical companies would in fact benefit from carrying out voluntary post-approval clinical trials: the elimination of quality uncertainty increases expected product differentiation, thereby raising prices for both high-quality and low-quality drugs. It is, however, to the disadvantage of consumers that trials are carried out. By extending the analysis to the case when prices cannot be raised, once the drug has been introduced on the market, we incorporate a prevalent feature of US and European markets. When prices cannot be raised, the entrant drug firm producing the new drug, no longer has incentives to carry out post-approval clinical trials.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Economics of Innovation and New Technology.

Volume (Year): 18 (2009)
Issue (Month): 5 ()
Pages: 513-531

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Handle: RePEc:taf:ecinnt:v:18:y:2009:i:5:p:513-531

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Related research

Keywords: quality uncertainty; symmetric information; pharmaceutical market; clinical trial;

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  1. Schmalensee, Richard., 1980. "Product differentiation advantages of pioneering brands," Working papers 1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Helmut Bester, 1998. "Quality Uncertainty Mitigates Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 828-844, Winter.
  3. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Rogerson, William P, 1988. "Price Advertising and the Deterioration of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 55(2), pages 215-29, April.
  5. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
  6. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  7. Pierre Azoulay, 2002. "Do Pharmaceutical Sales Respond to Scientific Evidence?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(4), pages 551-594, December.
  8. Z. John Lu & William S. Comanor, 1998. "Strategic Pricing Of New Pharmaceuticals," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 108-118, February.
  9. Mats Ekelund & Björn Persson, 2003. "Pharmaceutical Pricing in a Regulated Market," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 298-306, May.
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