Private versus Social Incentives for Pharmaceutical Innovation

33 Pages Posted: 28 Jan 2016

See all articles by Paula Gonzalez

Paula Gonzalez

Universidad Pablo de Olavide

Ines Macho-Stadler

Universidad Autonoma de Barcelona; Barcelona Graduate School of Economics (Barcelona GSE); CESifo (Center for Economic Studies and Ifo Institute)

David Pérez-Castrillo

Universidad Autonoma de Barcelona; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 23, 2015

Abstract

We provide a theoretical framework to contribute to the current debate regarding the tendency of pharmaceutical companies to direct their R&D toward marketing products that are “follow-on” drugs of already existing drugs, rather than toward the development of breakthrough drugs. We construct a model with a population of patients who can be treated with drugs that are horizontally and vertically differentiated. In addition to a pioneering drug, a new drug can be marketed as the result of an innovative process. We analyze physician prescription choices and the optimal pricing decision of an innovative firm. We also characterize the incentives of the innovative firm to conduct R&D activities, disentangling the quest for breakthrough drugs from the firm effort to develop follow-on drugs. Our results offer theoretical support for the conventional wisdom that pharmaceutical firms devote too many resources to conducting R&D activities that lead to incremental innovations.

Keywords: pharmaceuticals, R&D activities, me-too drugs, breakthrough drugs, incremental innovation, radical innovation

JEL Classification: I100

Suggested Citation

Gonzalez, Paula and Macho-Stadler, Ines and Pérez-Castrillo, David, Private versus Social Incentives for Pharmaceutical Innovation (December 23, 2015). CESifo Working Paper Series No. 5672, Available at SSRN: https://ssrn.com/abstract=2723803

Paula Gonzalez (Contact Author)

Universidad Pablo de Olavide ( email )

Ctra. Utrera, Km.1
Sevilla, Seville 41010
Spain
+34 954 34 83 80 (Phone)
+34 954 34 93 39 (Fax)

Ines Macho-Stadler

Universidad Autonoma de Barcelona ( email )

Departamento de Economia e Historia Economica
08193 Barcelona
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

David Pérez-Castrillo

Universidad Autonoma de Barcelona ( email )

Edifici B - Campus Bellaterra
Barcelona, 08193
Spain
(34 93) 381 1405 (Phone)
(34 93) 581 2012 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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