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Napsterizing Pharmaceuticals: Access, Innovation and Consumer Welfare

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

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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Date of creation: 31 Oct 2003
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Handle: RePEc:cla:levarc:618897000000000555
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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.
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  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. Fiona M. Scott Morton, 1999. "Entry Decisions in the Generic Pharmaceutical Industry," Yale School of Management Working Papers ysm119, Yale School of Management.
  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. Rebecca Henderson & Iain Cockburn, . "Scale, Scope and Spillovers: The Determinants of Research Productivity in Drug Discovery," Working Papers ec25/94, Department of Economics, University of Lancaster.
  14. Frank R. Lichtenberg, 1998. "Pharmaceutical Innovation, Mortality Reduction, and Economic Growth," NBER Working Papers 6569, National Bureau of Economic Research, Inc.
  15. Frank R. Lichtenberg, 1996. "The Effect of Pharmaceutical Utilization and Innovation on Hospitalization and Mortality," NBER Working Papers 5418, National Bureau of Economic Research, Inc.
  16. repec:cup:cbooks:9780521004886 is not listed on IDEAS
  17. 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.
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