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When is Prevention More Profitable than Cure?

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  • Michael Kremer
  • Christopher Snyder

Abstract

We argue that in pharmaceutical markets, variation in the arrival time of consumer heterogeneity creates differences between a producer’s ability to extract consumer surplus with preventives and treatments, potentially distorting R&D decisions. If consumers vary only in disease risk, revenue from treatments—sold after the disease is contracted, when disease risk is no longer a source of private information—always exceeds revenue from preventives. The revenue ratio can be arbitrarily high for sufficiently skewed distributions of disease risk. Under some circumstances, heterogeneity in harm from a disease, learned after a disease is contracted, can lead revenue from a treatment to exceed revenue from a preventative. Calibrations suggest that skewness in the U.S. distribution of HIV risk would lead firms to earn only half the revenue from a vaccine as from a drug. Empirical tests are consistent with the predictions of the model that vaccines are less likely to be developed for diseases with substantial disease-risk heterogeneity.

Suggested Citation

  • Michael Kremer & Christopher Snyder, 2013. "When is Prevention More Profitable than Cure?," CID Working Papers 252, Center for International Development at Harvard University.
  • Handle: RePEc:cid:wpfacu:252
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    Cited by:

    1. Rowthorn, Robert & Toxvaerd, Flavio, 2012. "The Optimal Control of Infectious Diseases via Prevention and Treatment," CEPR Discussion Papers 8925, C.E.P.R. Discussion Papers.
    2. Michael Kremer & Christopher M. Snyder, 2018. "Preventives Versus Treatments Redux: Tighter Bounds on Distortions in Innovation Incentives with an Application to the Global Demand for HIV Pharmaceuticals," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 53(1), pages 235-273, August.
    3. Kremer, Michael & Snyder, Christopher, 2018. "Preventives Versus Treatments Redux: Tighter Bounds on Distortions in Innovation Incentives with an Application to the Global D," CEPR Discussion Papers 12751, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Pharmaceuticals; Vaccines; Drugs;
    All these keywords.

    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
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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