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Pharmaceutical Patents: Incentives for R&D or Marketing?

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  • Kurt R. Brekke
  • Odd Rune Straume

Abstract

We analyse how a patent-holding pharmaceutical firm may strategically use advertising of existing drugs to affect R&D investments in new (differentiated) drugs, and thereby affect the probability distribution of future market structures in the industry. Within a fairly generalmodel 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 suchoverinvestment 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 Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2433.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2433

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Related research

Keywords: marketing; Research & Development; pharmaceutical;

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References

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  1. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, American Economic Association, vol. 73(4), pages 741-48, September.
  2. Kurt R Brekke & Michael Kuhn, . "Direct-to-Consumer Advertising in Pharmaceutical Markets," Discussion Papers, Department of Economics, University of York 03/11, Department of Economics, University of York.
  3. Langinier, Corinne, 2004. "Are Patents Strategic Barriers to Entry?," Staff General Research Papers, Iowa State University, Department of Economics 11482, Iowa State University, Department of Economics.
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  7. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 514-26, June.
  8. Rizzo, John A, 1999. "Advertising and Competition in the Ethical Pharmaceutical Industry: The Case of Antihypertensive Drugs," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 42(1), pages 89-116, April.
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  11. Denicolo, Vincenzo, 1996. "Patent Races and Optimal Patent Breadth and Length," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 249-65, September.
  12. Kurt R. Brekke & Ingrid Königbauer & Odd Rune Straume, 2006. "Reference Pricing of Pharmaceuticals," CESifo Working Paper Series 1825, CESifo Group Munich.
  13. Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 636-53, August.
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  15. Konigbauer, Ingrid, 2007. "Advertising and generic market entry," Journal of Health Economics, Elsevier, Elsevier, vol. 26(2), pages 286-305, March.
  16. Ishigaki, Hiroaki, 2000. "Informative advertising and entry deterrence: a Bertrand model," Economics Letters, Elsevier, Elsevier, vol. 67(3), pages 337-343, June.
  17. Grabowski, Henry G & Vernon, John M, 1992. "Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 35(2), pages 331-50, October.
  18. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(1), pages 63-81, January.
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  20. 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.
  21. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(3), pages 488-511, June.
  22. Hurwitz, Mark A & Caves, Richard E, 1988. "Persuasion or Information? Promotion and the Shares of Brand Name and Generic Pharmaceuticals," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 31(2), pages 299-320, October.
  23. Sakakibara, Mariko & Branstetter, Lee, 2001. "Do Stronger Patents Induce More Innovation? Evidence from the 1988 Japanese Patent Law Reforms," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 77-100, Spring.
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Cited by:
  1. Kurt R. Brekke & Tor Helge Holmås & Odd Rune Straume, 2010. "Reference Pricing, Competition, and Pharmaceutical Expenditures: Theory and Evidence from a Natural Experiment," CESifo Working Paper Series 3258, CESifo Group Munich.

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