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R&D in the pharmaceutical industry: A world of small innovations

It is commonly argued that in recent years pharmaceutical companies have directed their R&D towards small improvements of existing compounds instead of more risky drastic innovations. In this paper we show that the proliferation of these small innovations is likely to be linked to the lack of market sensitivity of a part of the demand to changes in prices. Compared to their social contribution, small innovations are relatively more profitable than large ones because they are targeted to the smaller but more inelastic part of the demand. We also study the effect of regulatory instruments such as price ceilings, copayments and reference prices and extend the analysis to competition in research.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 936.

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Date of creation: Dec 2005
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Handle: RePEc:upf:upfgen:936
Contact details of provider: Web page: http://www.econ.upf.edu/

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