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R& D in the Pharmaceutical Industry: A World of Small Innovations

  • Juan-José Ganuza

    ()

    (Department of Economics, Universitat Pompeu Fabra, 08005 Barcelona, Spain)

  • Gerard Llobet

    ()

    (Centro de Estudios Monetarios y Financieros (CEMFI), 28014 Madrid, Spain)

  • Beatriz Domínguez

    ()

    (BBVA, 28046 Madrid, Spain)

It is commonly argued that in recent years pharmaceutical companies have targeted their research and development (R& D) at small improvements of existing compounds instead of riskier drastic innovations. In this paper, we show that the bias in the pharmaceutical industry toward small innovations might be driven by the low sensitivity of the demand. In particular, small innovations get a proportionally larger reward because pharmaceutical firms target them at the inelastic segments of the demand. As a consequence, firms find it relatively more profitable to invest in small innovations. We also study the effect on R& D incentives of marketing strategies and regulatory instruments aimed at controlling pharmaceutical expenditure.

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File URL: http://dx.doi.org/10.1287/mnsc.1080.0959
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 55 (2009)
Issue (Month): 4 (April)
Pages: 539-551

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Handle: RePEc:inm:ormnsc:v:55:y:2009:i:4:p:539-551
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