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"Napsterizing" Pharmaceuticals: Access, Innovation, and Consumer Welfare

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  • James W. Hughes
  • Michael J. Moore
  • Edward A. Snyder

Abstract

We analyze the effects on consumers of an extreme policy experiment -- Napsterizing' pharmaceuticals -- whereby all patent rights on branded prescription drugs are eliminated for both existing and future prescription drugs without compensation to the patent holders. The question of whether this policy maximizes consumer welfare cannot be resolved on an a priori basis due to an obvious tradeoff: While accelerating generic entry will yield substantial gains in consumer surplus associated with greater access to the current stock of pharmaceuticals, future consumers will be harmed by reducing the flow of new pharmaceuticals to the market. Our estimates of the consumer surpluses at stake are based on the stylized facts concerning how generic entry has affected prices, outputs, and market shares. We find that providing greater access to the current stock of prescription drugs yields large benefits to existing consumers. However, realizing those benefits has a substantially greater cost in terms of lost consumer benefits from reductions in the flow of new drugs. Specifically, the model yields the result that for every dollar in consumer benefit realized from providing greater access to the current stock, future consumers would be harmed at a rate of three dollars in present value terms from reduced future innovation. We obtain this result even accounting for the stylized fact that after generic entry branded drugs continue to earn significant price premia over generic products and hence recognizing that Napsterizing does not completely eliminate the incentives to innovate.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9229.

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Date of creation: Sep 2002
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Handle: RePEc:nbr:nberwo:9229

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  1. Frank Lichtenberg, 2000. "The Benefits and Costs of Newer Drugs: Evidence from the 1996 Medical Expenditure Panel Survey," CESifo Working Paper Series 404, CESifo Group Munich.
  2. Richard A. Posner, 1974. "Theories of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 5(2), pages 335-358, Autumn.
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  5. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," NBER Working Papers 6789, National Bureau of Economic Research, Inc.
  6. Lichtenberg, Frank R, 1996. "Do (More and Better) Drugs Keep People Out of Hospitals?," American Economic Review, American Economic Association, vol. 86(2), pages 384-88, May.
  7. Fiona M. Scott Morton, 1999. "Entry Decisions in the Generic Pharmaceutical Industry," Yale School of Management Working Papers ysm119, Yale School of Management.
  8. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  9. Rebecca Henderson & Iain Cockburn, 1996. "Scale, Scope, and Spillovers: The Determinants of Research Productivity in Drug Discovery," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 32-59, Spring.
  10. Grabowski, Henry G & Vernon, John M, 1987. "Pioneers, Imitators, and Generics--A Simulation Model of Schumpeterian Competition," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 491-525, August.
  11. Frank R. Lichtenberg, 1998. "Pharmaceutical Innovation, Mortality Reduction, and Economic Growth," NBER Working Papers 6569, National Bureau of Economic Research, Inc.
  12. Cowling, Keith & Mueller, Dennis C, 1978. "The Social Costs of Monopoly Power," Economic Journal, Royal Economic Society, vol. 88(352), pages 727-48, December.
  13. Fogel,Robert William, 2004. "The Escape from Hunger and Premature Death, 1700–2100," Cambridge Books, Cambridge University Press, number 9780521004886, April.
  14. Fiona M. Scott Morton, 1999. "Entry Decisions in the Generic Pharmaceutical Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 421-440, Autumn.
  15. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
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Cited by:
  1. Frank R. Lichtenberg, 2007. "Importation And Innovation," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 16(6), pages 403-417.
  2. Chiara Bonassi & Fabio Pammolli & Massimo Riccaboni & Nicola Carmine Salerno, 2007. "Regolazione, innovazione e ciclo di vita dei prodotti - per una riforma del pricing al lancio e della governance della spesa nella farmaceutica pubblica," Working Papers 02-2007, Competitività Regole Mecati (CERM).
  3. Virabhak, Suchin & Sohn, Wook, 2008. "Drug competition and voluntary exit," Economics Letters, Elsevier, vol. 101(1), pages 34-37, October.
  4. An-Hsiang Liu & Ralph Siebert & Christine Zulehner, 2013. "The Impact of Entry Regulation on Total Welfare: A Policy Experiment," CESifo Working Paper Series 4291, CESifo Group Munich.
  5. Lee G. Branstetter & Chirantan Chatterjee & Matthew Higgins, 2011. "Regulation and Welfare: Evidence from Paragraph IV Generic Entry in the Pharmaceutical Industry," NBER Working Papers 17188, National Bureau of Economic Research, Inc.

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