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Market Size and Pharmaceutical Innovation

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  • Seabright, Paul
  • Scott Morton, Fiona
  • Dubois, Pierre
  • de Mouzon, Olivier

Abstract

This paper quantifies the relationship between market size and innovation in the pharmaceutical industry. We estimate the elasticity of innovation, as measured by the number of new chemical entities appearing on the market for a given disease class, to the potential market size represented by the willingness of sufferers of diseases in that class (and others acting on their behalf such as insurers and governments) to spend on their treatment during the patent lifetime. We find positive significant elasticities with a point estimate under our preferred specification of 25.2%. This suggests that at the mean market size an additional $1.8 billion is required in additional patent life revenue to induce the invention of one additional new chemical entity. An elasticity substantially and significantly below one-half is also a plausible implication of the hypothesis that innovation in pharmaceuticals is becoming more difficult and expensive over time, as costs of regulatory approval rise and as the industry runs out of "low hanging fruit."

Suggested Citation

  • Seabright, Paul & Scott Morton, Fiona & Dubois, Pierre & de Mouzon, Olivier, 2011. "Market Size and Pharmaceutical Innovation," CEPR Discussion Papers 8367, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8367
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    More about this item

    Keywords

    Elasticity; Innovation; Market size; Pharmaceuticals;
    All these keywords.

    JEL classification:

    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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