Paper #936

Title:

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

Authors:

Beatriz Domínguez, Juan José Ganuza and Gerard Llobet

Date:

December 2005

Abstract:

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.

Keywords:

Health-care, pharmaceuticals, innovation

JEL codes:

I11, I18, L51, O31

Area of Research:

Business Economics and Industrial Organization / Microeconomics / Labour, Public, Development and Health Economics

Download the paper in PDF format