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

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  • Khazabi, Massoud
  • Quyen, Nguyen

Abstract

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
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    References listed on IDEAS

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    Cited by:

    1. Emilio Castillo, 2020. "Mineral Exploration and the Discovery of New Deposits," Working Papers 2020-06, Colorado School of Mines, Division of Economics and Business.
    2. Appio, Francesco Paolo & Baglieri, Daniela & Cesaroni, Fabrizio & Spicuzza, Lucia & Donato, Alessia, 2022. "Patent design strategies: Empirical evidence from European patents," Technological Forecasting and Social Change, Elsevier, vol. 181(C).

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    More about this item

    Keywords

    R&D; Patent; Spillovers;
    All these keywords.

    JEL classification:

    • 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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