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Pharmaceutical Patents: Incentives for Research and Development or Marketing?

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Kurt R. Brekke & Odd Rune Straume, 2009. "Pharmaceutical Patents: Incentives for Research and Development or Marketing?," Southern Economic Journal, Southern Economic Association, vol. 76(2), pages 351-374, October.
  • Handle: RePEc:sej:ancoec:v:76:2:y:2009:p:351-374
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    File URL: http://dx.doi.org/10.4284/sej.2009.76.2.351
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    Citations

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    Cited by:

    1. Grossmann, Volker, 2013. "Do cost-sharing and entry deregulation curb pharmaceutical innovation?," Journal of Health Economics, Elsevier, vol. 32(5), pages 881-894.
    2. repec:spr:rvmgts:v:12:y:2018:i:1:d:10.1007_s11846-016-0218-8 is not listed on IDEAS
    3. Abraham Garcia, 2011. "The relevance of marketing in the success of innovations," JRC Working Papers on Corporate R&D and Innovation 2011-09, Joint Research Centre (Seville site).
    4. Brekke, Kurt R. & Holmas, Tor Helge & Straume, Odd Rune, 2011. "Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment," Journal of Public Economics, Elsevier, vol. 95(7), pages 624-638.

    More about this item

    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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