"Napsterizing" Pharmaceuticals: Access, Innovation, and Consumer Welfare

56 Pages Posted: 27 Sep 2002 Last revised: 25 May 2014

See all articles by James W. Hughes

James W. Hughes

Bates College - Department of Economics

Michael J. Moore

University of Virginia - Darden School of Business; National Bureau of Economic Research (NBER)

Edward A. Snyder

University of Chicago - Booth School of Business

Date Written: September 2002

Abstract

We analyze the effects on consumers of an extreme policy experiment -- Napsterizing' pharmaceuticals -- whereby all patent rights on branded prescription drugs are eliminated for both existing and future prescription drugs without compensation to the patent holders. The question of whether this policy maximizes consumer welfare cannot be resolved on an a priori basis due to an obvious tradeoff: While accelerating generic entry will yield substantial gains in consumer surplus associated with greater access to the current stock of pharmaceuticals, future consumers will be harmed by reducing the flow of new pharmaceuticals to the market. Our estimates of the consumer surpluses at stake are based on the stylized facts concerning how generic entry has affected prices, outputs, and market shares. We find that providing greater access to the current stock of prescription drugs yields large benefits to existing consumers. However, realizing those benefits has a substantially greater cost in terms of lost consumer benefits from reductions in the flow of new drugs. Specifically, the model yields the result that for every dollar in consumer benefit realized from providing greater access to the current stock, future consumers would be harmed at a rate of three dollars in present value terms from reduced future innovation. We obtain this result even accounting for the stylized fact that after generic entry branded drugs continue to earn significant price premia over generic products and hence recognizing that Napsterizing does not completely eliminate the incentives to innovate.

Suggested Citation

Hughes, James Wesley and Moore, Michael J. and Snyder, Edward (Ted) A., "Napsterizing" Pharmaceuticals: Access, Innovation, and Consumer Welfare (September 2002). NBER Working Paper No. w9229, Available at SSRN: https://ssrn.com/abstract=334321

James Wesley Hughes

Bates College - Department of Economics ( email )

Lewiston, ME 04240
United States

Michael J. Moore (Contact Author)

University of Virginia - Darden School of Business ( email )

Box 6550
Faculty 121
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/mooremi.htm

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Edward (Ted) A. Snyder

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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