IDEAS home Printed from
   My bibliography  Save this paper

The Search for New Drugs: A Theory of R&D in the Pharmaceutical Industry


  • Khazabi, Massoud
  • Quyen, Nguyen


The paper formalizes, in a rigorous manner, the concept of information externalities, by modeling R&D activities as the process of searching for a drug to treat a disease, with R&D activities being modeled from the perspective of the theory of optimal search. In conventional models of patent design, only one brand - the brand with the highest quality - is available on the market at any time. Furthermore, demand is completely inelastic: each consumer, regardless of income and regardless of the price of the brand offered on the market, buys exactly one unit of the brand. In this model, which is a dynamic model in continuous time, several differentiated products - the products whose patents are still in force and the products whose patents have expired - are available at any time on the market. Furthermore, the demand for a brand depends on income, its own price, and the prices of the other brands. The analyses of R&D as well as the impact of the cost and the quality of newly discovered drugs on the market are represented under this framework, when the pharmaceutical firms with an active drug discovery program behave strategically in both R&D and in the product market.

Suggested Citation

  • Khazabi, Massoud & Quyen, Nguyen, 2010. "The Search for New Drugs: A Theory of R&D in the Pharmaceutical Industry," MPRA Paper 39462, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39462

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    1. Eaton, Jonathan & Kortum, Samuel, 2001. "Technology, trade, and growth: A unified framework," European Economic Review, Elsevier, vol. 45(4-6), pages 742-755, May.
    2. Arrow, Kenneth J. & Chang, Sheldon, 1982. "Optimal pricing, use, and exploration of uncertain natural resource stocks," Journal of Environmental Economics and Management, Elsevier, vol. 9(1), pages 1-10, March.
    3. Tandon, Pankaj, 1982. "Optimal Patents with Compulsory Licensing," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 470-486, June.
    4. Ted O'Donoghue & Suzanne Scotchmer & Jacques-François Thisse, 1998. "Patent Breadth, Patent Life, and the Pace of Technological Progress," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 1-32, March.
    5. Tuomas Takalo, 2001. "On the optimal patent policy," Finnish Economic Papers, Finnish Economic Association, vol. 14(1), pages 33-40, Spring.
    6. Cairns, Robert D. & Van Quyen, Nguyen, 1998. "Optimal Exploration for and Exploitation of Heterogeneous Mineral Deposits," Journal of Environmental Economics and Management, Elsevier, vol. 35(2), pages 164-189, March.
    7. repec:fth:bosecd:110 is not listed on IDEAS
    8. N. V. Quyen, 1991. "Exhaustible Resources: A Theory of Exploration," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 777-789.
    Full references (including those not matched with items on IDEAS)

    More about this item


    R&D; Patent; Spillovers;

    JEL classification:

    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital


    Access and download statistics


    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:pra:mprapa:39462. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.