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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.

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File URL: http://mpra.ub.uni-muenchen.de/39462/1/MPRA_paper_39462.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39462.

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Date of creation: 01 Sep 2010
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Handle: RePEc:pra:mprapa:39462
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  1. 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.
  2. 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, 03.
  3. Quyen, N V, 1991. "Exhaustible Resources: A Theory of Exploration," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 777-89, July.
  4. Tandon, Pankaj, 1982. "Optimal Patents with Compulsory Licensing," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 470-86, June.
  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. Eaton, Jonathan & Kortum, Samuel, 2001. "Technology, trade, and growth: A unified framework," European Economic Review, Elsevier, vol. 45(4-6), pages 742-755, May.
  8. repec:fth:bosecd:110 is not listed on IDEAS
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