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Innovation and Market Structure in Pharmaceuticals: An Econometric Analysis on Simulated Data

Author

Listed:
  • Christian Garavaglia
  • Franco Malerba
  • Luigi Orsenigo
  • Michele Pezzoni

    () (CRIOS - Center for Research on Innovation, Organization and Strategy (University of Bocconi))

Abstract

The contribution of this paper is twofold. First, it presents the results of a “history-friendly” simulation model of evolution of the pharmaceutical industry. Second, it aims at contributing to a more general methodological discussion about agent-based models by proposing an econometric analysis of the results of the simulations. The case of the pharmaceutical industry has been studied extensively by scholars because, despite the high level of R&D intensity, the industry has been characterized by a relatively low levels of concentration. The model is able to reproduce the main stylized facts of the industry in an evolutionary perspective. In this paper we extend the analysis conducted in two previous works (Garavaglia et al. 2012, 2013) by further qualifying the findings with an extensive econometric investigation of the model outputs. The paper focuses the attention on the determinants of market structure, the innovative performance of the industry, the diversification in multiple submarkets and the level of prices. We find that the properties of the technological and demand regimes are key determinants of the patterns of industry evolution and that the main mechanisms driving the model are the random processes of search, the discovery of new submarkets as well as the interactions between patent protection, imitation and price competition. In addition, this paper emphasizes how the emerging leaders in the industry are those innovative early entrants which entered in large submarkets, showing the importance of the first mover advantage and of the size of the “prize” accruing to innovators when they discover a new rich submarket.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Christian Garavaglia & Franco Malerba & Luigi Orsenigo & Michele Pezzoni, 2014. "Innovation and Market Structure in Pharmaceuticals: An Econometric Analysis on Simulated Data," Post-Print halshs-01074524, HAL.
  • Handle: RePEc:hal:journl:halshs-01074524
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01074524
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    References listed on IDEAS

    as
    1. Franco Malerba & Richard Nelson & Luigi Orsenigo & Sidney Winter, 2008. "Vertical integration and disintegration of computer firms: a history-friendly model of the coevolution of the computer and semiconductor industries," Industrial and Corporate Change, Oxford University Press, vol. 17(2), pages 197-231, April.
    2. Franco Malerba & Luigi Orsenigo, 2002. "Innovation and market structure in the dynamics of the pharmaceutical industry and biotechnology: towards a history-friendly model," Industrial and Corporate Change, Oxford University Press, vol. 11(4), pages 667-703, August.
    3. Christian Garavaglia & Franco Malerba & Luigi Orsenigo & Michele Pezzoni, 2013. "A Simulation Model of the Evolution of the Pharmaceutical Industry: A History-Friendly Model," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 16(4), pages 1-5.
    4. Gambardella,Alfonso, 1995. "Science and Innovation," Cambridge Books, Cambridge University Press, number 9780521451185, December.
    5. repec:rje:randje:v:37:y:2006:i:4:p:861-886 is not listed on IDEAS
    6. Klepper, Steven, 1997. "Industry Life Cycles," Industrial and Corporate Change, Oxford University Press, vol. 6(1), pages 145-181.
    7. Christian Garavaglia & Franco Malerba & Luigi Orsenigo & Michele Pezzoni, 2010. "A History-Friendly Model of the Evolution of the Pharmaceutical Industry: Technological Regimes and Demand Structure," KITeS Working Papers 036, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Nov 2010.
    8. Grabowski, Henry G & Vernon, John M, 1977. "Consumer Protection Regulation in Ethical Drugs," American Economic Review, American Economic Association, vol. 67(1), pages 359-364, February.
    9. Christian Garavaglia & Franco Malerba & Luigi Orsenigo & Michele Pezzoni, 2012. "Technological regimes and demand structure in the evolution of the pharmaceutical industry," Journal of Evolutionary Economics, Springer, vol. 22(4), pages 677-709, September.
    10. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
    11. Guido Buenstorf & Steven Klepper, 2010. "Submarket dynamics and innovation: the case of the US tire industry," Industrial and Corporate Change, Oxford University Press, vol. 19(5), pages 1563-1587, October.
    12. Garavaglia, Christian, 2010. "Modelling industrial dynamics with "History-friendly" simulations," Structural Change and Economic Dynamics, Elsevier, vol. 21(4), pages 258-275, November.
    13. Malerba, Franco & Orsenigo, Luigi, 1996. "Schumpeterian patterns of innovation are technology-specific," Research Policy, Elsevier, vol. 25(3), pages 451-478, May.
    14. Kleijnen, J.P.C., 1997. "Sensitivity analysis and related analyses : A review of some statistical techniques," Other publications TiSEM 7969b135-47c5-4d76-9241-c, Tilburg University, School of Economics and Management.
    15. Giulio Bottazzi & Angelo Secchi, 2005. "Growth and Diversification Patterns of the Worldwide Pharmaceutical Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(2), pages 195-216, December.
    16. Malerba, Franco, et al, 1999. "'History-Friendly' Models of Industry Evolution: The Computer Industry," Industrial and Corporate Change, Oxford University Press, vol. 8(1), pages 3-40, March.
    17. Breschi, Stefano & Malerba, Franco & Orsenigo, Luigi, 2000. "Technological Regimes and Schumpeterian Patterns of Innovation," Economic Journal, Royal Economic Society, vol. 110(463), pages 388-410, April.
    18. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
    19. Steven Klepper & Peter Thompson, 2006. "Submarkets and the evolution of market structure," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 861-886, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Innovation; market structure; Monte Carlo.; history-friendly; pharmaceuticals;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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