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Pharmaceutical Patents: Incentives for Research and Development or Marketing?

  • Kurt R. Brekke


    (Norwegian School of Economics and Business Administration, Department of Economics and Health Economics Bergen (HEB), Helleveien 30, N-5045 Bergen, Norway)

  • Odd Rune Straume


    (Department of Economics/Economic Policies Research Unit (NIPE), University of Minho, Campus de Gualtar, 4710-057 Braga, Portugal; and Department of Economics/HEB, University of Bergen, Norway)

We analyze how a patent-holding pharmaceutical firm may strategically use advertising of existing drugs to affect research and development (R&D) investments in new (differentiated) drugs, and thereby affect the probability distribution of future market structures in the industry. Within a fairly general model 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 such overinvestment 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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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 76 (2009)
Issue (Month): 2 (October)
Pages: 351-374

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Handle: RePEc:sej:ancoec:v:76:2:y:2009:p:351-374
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