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Market Size and Pharmaceutical Innovation

Author Info

Listed author(s):
  • Dubois, Pierre
  • de Mouzon, Olivier
  • Scott Morton, Fiona
  • Seabright, Paul

Abstract

This paper quantifies the relationship between market size and innovation in the pharmaceutical industry using improved, and newer, methods and data. We find positive significant elasticities of innovation to expected market size with a point estimate under our preferred specification of 0.23. This suggests that, on average, $2.5 billion is required in additional revenue to support the invention of one new chemical entity. This magnitude is plausible given recent accounting estimates of the cost of innovation of 800 million to one billion per drug, and marginal costs of manufacture and distribution near 50%. An elasticity below 1 is also a plausible implication of the hypothesis that innovation in pharmaceuticals is becoming more difficult over time, as costs of regulatory approval rise and as the industry runs out of "low-hanging fruit".

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 11-232.

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Date of creation: Apr 2011
Date of revision: Mar 2014
Publication status: Published in The RAND Journal of Economics, vol. 46, n°4, Winter 2015, p. 844-871.
Handle: RePEc:tse:wpaper:24353
Contact details of provider: Phone: (+33) 5 61 12 86 23
Web page: http://www.tse-fr.eu/

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Keywords: Innovation; Market Size; Elasticity; Pharmaceuticals;

Other versions of this item:

Find related papers by JEL classification:
  • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
  • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
  • 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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  1. Kurt R. Brekke & Tor Helge Holmås & Odd Rune Straume, 2008. "Regulation, generic competition and pharmaceutical prices: Theory and evidence from a natural experiment," NIPE Working Papers 01/2008, NIPE - Universidade do Minho.
  2. Mark Duggan & Fiona Scott Morton, 2010. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," American Economic Review, American Economic Association, vol. 100(1), pages 590-607, March.
  3. Arthur Lewbel & Oliver Linton, 2002. "Nonparametric Censored and Truncated Regression," Econometrica, Econometric Society, vol. 70(2), pages 765-779, March.
  4. Panle Gia & Pinelopi K. Goldberg & Shubham Chaudhuri, 2006. "Estimating the Effects of Global Patent Protection in Pharmaceuticals: A Case Study of Quinolones in India," American Economic Review, American Economic Association, vol. 96(5), pages 1477-1514, December.
  5. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G. & Lasagna, Louis, 1991. "Cost of innovation in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 10(2), pages 107-142, July.
  6. Yin, Wesley, 2009. "R&D policy, agency costs and innovation in personalized medicine," Journal of Health Economics, Elsevier, vol. 28(5), pages 950-962, September.
  7. Brekke, Kurt R. & Grasdal, Astrid L. & Holms, Tor Helge, 2009. "Regulation and pricing of pharmaceuticals: Reference pricing or price cap regulation?," European Economic Review, Elsevier, vol. 53(2), pages 170-185, February.
  8. Frank R. Lichtenberg & Gautier Duflos, 2008. "Pharmaceutical innovation and the longevity of Australians: a first look," NBER Working Papers 14009, National Bureau of Economic Research, Inc.
  9. Margaret K. Kyle & Anita M. McGahan, 2012. "Investments in Pharmaceuticals Before and After TRIPS," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1157-1172, November.
  10. Blume-Kohout, Margaret E. & Sood, Neeraj, 2013. "Market size and innovation: Effects of Medicare Part D on pharmaceutical research and development," Journal of Public Economics, Elsevier, vol. 97(C), pages 327-336.
  11. Richard Blundell & James L. Powell, 2001. "Endogeneity in nonparametric and semiparametric regression models," CeMMAP working papers CWP09/01, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  12. Steven Berry & Joel Waldfogel, 2003. "Product Quality and Market Size," NBER Working Papers 9675, National Bureau of Economic Research, Inc.
  13. Rodrigo Cerda, 2007. "Endogenous innovations in the pharmaceutical industry," Journal of Evolutionary Economics, Springer, vol. 17(4), pages 473-515, August.
  14. 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.
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Cited by:

  1. Iain M. Cockburn & Jean O. Lanjouw & Mark Schankerman, 2016. "Patents and the Global Diffusion of New Drugs," American Economic Review, American Economic Association, vol. 106(1), pages 136-164, January.
  2. Mark Pauly & Kyle Myers, 2016. "A Ricardian-Demand Explanation for Changing Pharmaceutical R&D Productivity," NBER Working Papers 22720, National Bureau of Economic Research, Inc.
  3. Lemarié, Stéphane & Parenty, Sébastien, 2016. "Research incentives and tradeoff for improving productivity of different crops," 149th Seminar, October 27-28, 2016, Rennes, France 245161, European Association of Agricultural Economists.
  4. Stern, Ariel Dora, 2017. "Innovation under regulatory uncertainty: Evidence from medical technology," Journal of Public Economics, Elsevier, vol. 145(C), pages 181-200.
  5. Blume-Kohout, Margaret E. & Sood, Neeraj, 2013. "Market size and innovation: Effects of Medicare Part D on pharmaceutical research and development," Journal of Public Economics, Elsevier, vol. 97(C), pages 327-336.
  6. Jeffrey Clemens, 2012. "The Effect of U.S. Health Insurance Expansions on Medical Innovation," Discussion Papers 11-016, Stanford Institute for Economic Policy Research.
  7. Heidi L. Williams, 2016. "Intellectual Property Rights and Innovation: Evidence from Health Care Markets," Innovation Policy and the Economy, University of Chicago Press, vol. 16(1), pages 53-87.
  8. Eric Budish & Benjamin N. Roin & Heidi Williams, 2015. "Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials," American Economic Review, American Economic Association, vol. 105(7), pages 2044-2085, July.
  9. Eric Budish & Benjamin Roin & Heidi Williams, 2013. "Do fixed patent terms distort innovation? Evidence from cancer clinical trials," Discussion Papers 13-001, Stanford Institute for Economic Policy Research.
  10. David Dranove & Craig Garthwaite & Manuel Hermosilla, 2014. "Pharmaceutical Profits and the Social Value of Innovation," NBER Working Papers 20212, National Bureau of Economic Research, Inc.
  11. Barrenho, E & Smith, PC & Miraldo, M, 2013. "The determinants of attrition in drug development: a duration analysis," Working Papers 12204, Imperial College, London, Imperial College Business School.
  12. Felipa de Mello-Sampayo & Sofia de Sousa-Vale & Francisco Camoes, 2015. "Substitutability Between Drugs, Innovation, and Fiscal Policy in the Pharmaceutical Industry," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 273-289, November.
  13. IIZUKA Toshiaki & UCHIDA Gyo, 2016. "Promoting Innovation in Small Markets: Evidence from the market for rare and intractable diseases," Discussion papers 16036, Research Institute of Economy, Trade and Industry (RIETI).

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