IDEAS home Printed from https://ideas.repec.org/p/pab/wpaper/15.07.html
   My bibliography  Save this paper

Private versus Social Incentives for Pharmaceutical Innovation

Author

Listed:
  • Paula González

    (Department of Economics, Universidad Pablo de Olavide.)

  • Inés Macho-Stadler

    (Department of Economics, Universitat Autònoma de Barcelona and Barcelona GSE.)

  • David Pérez-Castrillo

    (Department of Economics, Universitat Autònoma de Barcelona and Barcelona GSE.)

Abstract

There is a great deal of debate in society regarding the tendency of pharmaceutical companies to direct their R&D toward marketing products that are "follow-on" drugs of already existing drugs, rather than the development of breakthrough drugs. This paper provides a theoretical framework to study firm incentives for pharmaceutical innovation that disentangle the quest for breakthrough drugs from the firm effort to develop follow-on drugs. We construct a model with a population of patients treated with one of two --horizontally and vertically differentiated-- drugs. One of the drugs is the pioneer; the other is the result of an innovative process by a firm that seeks to achieve an improvement over the existing drug. Our results offer theoretical support for the conventional wisdom that pharmaceutical firms devote too many resources to conducting R&D activities that lead to incremental innovations.

Suggested Citation

  • Paula González & Inés Macho-Stadler & David Pérez-Castrillo, 2015. "Private versus Social Incentives for Pharmaceutical Innovation," Working Papers 15.07, Universidad Pablo de Olavide, Department of Economics.
    • Handle: RePEc:pab:wpaper:15.07
    as

    Download full text from publisher

    File URL: http://www.upo.es/serv/bib/wps/econ1507.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bardey, D. & Bommier, A. & Jullien, B., 2010. "Retail price regulation and innovation: Reference pricing in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 29(2), pages 303-316, March.
    2. Ernst Berndt & Murray Aitken, 2011. "Brand Loyalty, Generic Entry and Price Competition in Pharmaceuticals in the Quarter Century after the 1984 Waxman-Hatch Legislation," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 18(2), pages 177-201.
    3. Juan-José Ganuza & Gerard Llobet & Beatriz Domínguez, 2009. "R& D in the Pharmaceutical Industry: A World of Small Innovations," Management Science, INFORMS, vol. 55(4), pages 539-551, April.
    4. Karan Girotra & Christian Terwiesch & Karl T. Ulrich, 2007. "Valuing R& D Projects in a Portfolio: Evidence from the Pharmaceutical Industry," Management Science, INFORMS, vol. 53(9), pages 1452-1466, September.
    5. Jasjit Singh & Lee Fleming, 2010. "Lone Inventors as Sources of Breakthroughs: Myth or Reality?," Management Science, INFORMS, vol. 56(1), pages 41-56, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marie‐Louise Leroux & Gregory Ponthiere, 2020. "Nursing home choice, family bargaining, and optimal policy in a Hotelling economy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(4), pages 899-932, August.
    2. Francesca Barigozzi & Izabela Jelovac, 2020. "Research funding and price negotiation for new drugs," Health Economics, John Wiley & Sons, Ltd., vol. 29(S1), pages 83-96, October.
    3. Patrick Leoni & Alvaro Sandroni, 2016. "Can patent duration hinder medical innovation," International Journal of Health Economics and Management, Springer, vol. 16(4), pages 397-406, December.
    4. Bruno Jullien & Yassine Lefouili, 2018. "Horizontal mergers and innovation," Post-Print hal-03263838, HAL.
    5. Bingqiang Li & Lei Huang, 2019. "The Effect of Incremental Innovation and Disruptive Innovation on the Sustainable Development of Manufacturing in China," SAGE Open, , vol. 9(1), pages 21582440198, February.
    6. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2024. "Competing with precision: incentives for developing predictive biomarker tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(1), pages 60-97, January.
    7. Bardey, David & Cremer, Helmuth & Lozachmeur, Jean-Marie, 2016. "The design of insurance coverage for medical products under imperfect competition," Journal of Public Economics, Elsevier, vol. 137(C), pages 28-37.
    8. Kurt R. Brekke & Odd Rune Straume & Dag Morten Dalen, 2023. "Taking the competitor´s pill: when combination therapies enter pharmaceutical markets," NIPE Working Papers 12/2023, NIPE - Universidade do Minho.
    9. Brekke, Kurt R. & Dalen, Dag Morten & Straume, Odd Rune, 2023. "The price of cost-effectiveness thresholds under therapeutic competition in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 90(C).
    10. Le, Son & Sukhatme, Neel U., 2020. "Reaching for mediocrity: Competition and stagnation in pharmaceutical innovation," International Review of Law and Economics, Elsevier, vol. 64(C).
    11. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2022. "The price of cost-effectiveness thresholds," NIPE Working Papers 5/2022, NIPE - Universidade do Minho.
    12. Brekke, Kurt R. & Dalen, Dag Morten & Straume, Odd Rune, 2022. "Paying for pharmaceuticals: uniform pricing versus two-part tariffs," Journal of Health Economics, Elsevier, vol. 83(C).
    13. Straume, Odd Rune, 2023. "Therapeutic reference pricing and drug innovation incentives," Economics Letters, Elsevier, vol. 222(C).
    14. Jelena Grujić & Slobodan Morača & Angela Fajsi, 2020. "Analysis of Risk Factors in the Channels of Drug Distribution: Professional Perspectives," Sustainability, MDPI, vol. 12(11), pages 1-20, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Le, Son & Sukhatme, Neel U., 2020. "Reaching for mediocrity: Competition and stagnation in pharmaceutical innovation," International Review of Law and Economics, Elsevier, vol. 64(C).
    2. Keith M. Drake & Martha A. Starr & Thomas McGuire, 2014. "Do "Reverse Payment" Settlements of Brand-Generic Patent Disputes in the Pharmaceutical Industry Constitute an Anticompetitive Pay for Delay?," NBER Working Papers 20292, National Bureau of Economic Research, Inc.
    3. Rajat Khanna & Isin Guler, 2022. "Degree assortativity in collaboration networks and invention performance," Strategic Management Journal, Wiley Blackwell, vol. 43(7), pages 1402-1430, July.
    4. Pankaj C. Patel & Marko Kohtamäki & Vinit Parida & Joakim Wincent, 2015. "Entrepreneurial orientation-as-experimentation and firm performance: The enabling role of absorptive capacity," Strategic Management Journal, Wiley Blackwell, vol. 36(11), pages 1739-1749, November.
    5. Baruch Lev & Suresh Radhakrishnan & Jamie Yixing Tong, 2021. "Earnings Component Volatilities: Capital Versus R&D Expenditures," Production and Operations Management, Production and Operations Management Society, vol. 30(5), pages 1475-1492, May.
    6. Puig-Junoy, Jaume & López-Valcárcel, Beatriz González, 2014. "Launch prices for new pharmaceuticals in the heavily regulated and subsidized Spanish market, 1995–2007," Health Policy, Elsevier, vol. 116(2), pages 170-181.
    7. Keith M. Drake & Martha A. Starr & Thomas G. McGuire, 2015. "Do "Reverse Payment" Settlements Constitute an Anticompetitive Pay-for-Delay?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 22(2), pages 173-200, July.
    8. Bardey, David & Harker, Arturo & Zuluaga, Daniela, 2021. "Price cap regulation in the Colombian pharmaceutical market: An impact evaluation," TSE Working Papers 21-1195, Toulouse School of Economics (TSE).
    9. Giuliani, Elisa & Martinelli, Arianna & Rabellotti, Roberta, 2016. "Is Co-Invention Expediting Technological Catch Up? A Study of Collaboration between Emerging Country Firms and EU Inventors," World Development, Elsevier, vol. 77(C), pages 192-205.
    10. Boeker, Warren & Howard, Michael D. & Basu, Sandip & Sahaym, Arvin, 2021. "Interpersonal relationships, digital technologies, and innovation in entrepreneurial ventures," Journal of Business Research, Elsevier, vol. 125(C), pages 495-507.
    11. Ernest Miguelez & Rosina Moreno, 2017. "Networks, Diffusion of Knowledge, and Regional Innovative Performance," International Regional Science Review, , vol. 40(4), pages 331-336, July.
    12. Yuchen Zhang & Wei Yang, 2022. "Breakthrough invention and problem complexity: Evidence from a quasi‐experiment," Strategic Management Journal, Wiley Blackwell, vol. 43(12), pages 2510-2544, December.
    13. Sternitzke, Christian, 2013. "An exploratory analysis of patent fencing in pharmaceuticals: The case of PDE5 inhibitors," Research Policy, Elsevier, vol. 42(2), pages 542-551.
    14. Branstetter, Lee & Chatterjee, Chirantan & Higgins, Matthew J., 2022. "Generic competition and the incentives for early-stage pharmaceutical innovation," Research Policy, Elsevier, vol. 51(10).
    15. Laura J. Kornish & Karl T. Ulrich, 2011. "Opportunity Spaces in Innovation: Empirical Analysis of Large Samples of Ideas," Management Science, INFORMS, vol. 57(1), pages 107-128, January.
    16. Thomas Ã…stebro & Kevyn Yong, 2016. "Invention Quality and Entrepreneurial Earnings: The Role of Prior Employment Variety," Entrepreneurship Theory and Practice, , vol. 40(2), pages 381-400, March.
    17. Krzysztof Klincewicz & Szymon Szumiał, 2022. "Successful patenting—not only how, but with whom: the importance of patent attorneys," Scientometrics, Springer;Akadémiai Kiadó, vol. 127(9), pages 5111-5137, September.
    18. Lara Agostini & Federico Caviggioli & Francesco Galati & Barbara Bigliardi, 2020. "A social perspective of knowledge-based innovation: mobility and agglomeration. Introduction to the special section," The Journal of Technology Transfer, Springer, vol. 45(5), pages 1309-1323, October.
    19. Aschhoff, Birgit & Sofka, Wolfgang, 2008. "Successful Patterns of Scientific Knowledge Sourcing: Mix and Match," ZEW Discussion Papers 08-033 [rev.], ZEW - Leibniz Centre for European Economic Research.
    20. Glenn Dutcher & Cortney S. Rodet, 2022. "Which two heads are better than one? Uncovering the positive effects of diversity in creative teams," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(4), pages 884-897, November.

    More about this item

    Keywords

    pharmaceuticals; R&D activities; me-too drugs; breakthrough drugs; incremental innovation; radical innovation.;
    All these keywords.

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pab:wpaper:15.07. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Publicación Digital - UPO (email available below). General contact details of provider: https://edirc.repec.org/data/deupoes.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.