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Patents: Incentives for R&D or Marketing?

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Abstract

We analyse how a patent-holding (incumbent) firm may strategically use advertising ex ante to a¤ect the R&D investments in new (di¤eren- tiated) products, and thus the ex post market structure in the industry. We derive exact conditions for advertising and R&D being substitute strategies for an incumbent firm and show that it may over-invest 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 this case, a more generous patent policy implies that a larger share of the patent rent is spent on marketing, relative to R&D. Our model, which is particularly fitted to the pharmaceutical industry, is analysed both within a general framework and in a more specific setting of informative advertising.

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  • Brekke, Kurt R. & Straume, Odd Rune, 2005. "Patents: Incentives for R&D or Marketing?," Working Papers in Economics 12/05, University of Bergen, Department of Economics.
    • Handle: RePEc:hhs:bergec:2005_012
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    1. Scott Morton, Fiona M., 2000. "Barriers to entry, brand advertising, and generic entry in the US pharmaceutical industry," International Journal of Industrial Organization, Elsevier, vol. 18(7), pages 1085-1104, October.
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    More about this item

    Keywords

    Marketing; Research & Development; Pharmaceuticals;
    All these keywords.

    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, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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