Pharmaceutical Patents: Incentives for R&D or Marketing?

44 Pages Posted: 28 Oct 2008

See all articles by Kurt Richard Brekke

Kurt Richard Brekke

Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 2008

Abstract

We analyse how a patent-holding pharmaceutical firm may strategically use advertising of existing drugs to affect R&D investments in new (differentiated) drugs, and thereby affect the probability distribution of future market structures in the industry. Within a fairly general model framework, we derive exact conditions for advertising and R&D being substitute strategies for the incumbent firm and show that it may overinvest in advertising to reduce the incentive for an entrant to invest in R&D, thereby reducing the probability of a new product on the market. In a more specific setting of informative advertising, we show that such overinvestment incentives are always present, and that more generous patent protection implies that a larger share of the patent rent is spent on marketing, relative to R&D.

Keywords: marketing, Research & Development, pharmaceutical

JEL Classification: I11, L13, O31

Suggested Citation

Brekke, Kurt Richard and Straume, Odd Rune, Pharmaceutical Patents: Incentives for R&D or Marketing? (October 2008). CESifo Working Paper Series No. 2433, Available at SSRN: https://ssrn.com/abstract=1291102

Kurt Richard Brekke (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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