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Market Size and Pharmaceutical Innovation

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

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

  • de Mouzon, Oliver & Dubois, Pierre & Scott Morton, Fiona & Seabright, Paul, 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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    Citations

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    Cited by:

    1. Dubois, Pierre & Sæthre, Morten, 2017. "On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector," Discussion Paper Series in Economics 3/2018, Norwegian School of Economics, Department of Economics.
    2. Iain M. Cockburn & Jean O. Lanjouw & Mark Schankerman, 2016. "Patents and the Global Diffusion of New Drugs," American Economic Review, American Economic Association, vol. 106(1), pages 136-164, January.
    3. repec:eee:respol:v:47:y:2018:i:5:p:980-991 is not listed on IDEAS
    4. Mark Pauly & Kyle Myers, 2016. "A Ricardian-Demand Explanation for Changing Pharmaceutical R&D Productivity," NBER Working Papers 22720, National Bureau of Economic Research, Inc.
    5. repec:eee:jhecon:v:54:y:2017:i:c:p:56-65 is not listed on IDEAS
    6. Frank, Richard G. & Zeckhauser, Richard J., 2018. "Excess Prices for Drugs in Medicare: Diagnosis and Prescription," Working Paper Series rwp18-005, Harvard University, John F. Kennedy School of Government.
    7. Lemarié, Stéphane & Parenty, Sébastien, 2016. "Research incentives and tradeoff for improving productivity of different crops," 149th Seminar, October 27-28, 2016, Rennes, France 245161, European Association of Agricultural Economists.
    8. Stern, Ariel Dora, 2017. "Innovation under regulatory uncertainty: Evidence from medical technology," Journal of Public Economics, Elsevier, vol. 145(C), pages 181-200.
    9. Blume-Kohout, Margaret E. & Sood, Neeraj, 2013. "Market size and innovation: Effects of Medicare Part D on pharmaceutical research and development," Journal of Public Economics, Elsevier, vol. 97(C), pages 327-336.
    10. Jeffrey Clemens, 2012. "The Effect of U.S. Health Insurance Expansions on Medical Innovation," Discussion Papers 11-016, Stanford Institute for Economic Policy Research.
    11. Heidi L. Williams, 2016. "Intellectual Property Rights and Innovation: Evidence from Health Care Markets," Innovation Policy and the Economy, University of Chicago Press, vol. 16(1), pages 53-87.
    12. repec:nbr:nberch:13994 is not listed on IDEAS
    13. Eric Budish & Benjamin N. Roin & Heidi Williams, 2015. "Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials," American Economic Review, American Economic Association, vol. 105(7), pages 2044-2085, July.
    14. Eric Budish & Benjamin Roin & Heidi Williams, 2013. "Do fixed patent terms distort innovation? Evidence from cancer clinical trials," Discussion Papers 13-001, Stanford Institute for Economic Policy Research.
    15. repec:eee:respol:v:47:y:2018:i:2:p:440-461 is not listed on IDEAS
    16. David Dranove & Craig Garthwaite & Manuel Hermosilla, 2014. "Pharmaceutical Profits and the Social Value of Innovation," NBER Working Papers 20212, National Bureau of Economic Research, Inc.
    17. Barrenho, E & Smith, PC & Miraldo, M, 2013. "The determinants of attrition in drug development: a duration analysis," Working Papers 12204, Imperial College, London, Imperial College Business School.
    18. Felipa de Mello-Sampayo & Sofia de Sousa-Vale & Francisco Camoes, 2015. "Substitutability Between Drugs, Innovation, and Fiscal Policy in the Pharmaceutical Industry," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 273-289, November.
    19. IIZUKA Toshiaki & UCHIDA Gyo, 2016. "Promoting Innovation in Small Markets: Evidence from the market for rare and intractable diseases," Discussion papers 16036, Research Institute of Economy, Trade and Industry (RIETI).
    20. Amitabh Chandra & Craig Garthwaite & Ariel Dora Stern, 2018. "Characterizing the Drug Development Pipeline for Precision Medicines," NBER Chapters,in: Economic Dimensions of Personalized and Precision Medicine National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    elasticity; innovation; market size; pharmaceuticals;

    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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