Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/128373 
Year of Publication: 
2015
Series/Report no.: 
CESifo Working Paper No. 5672
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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 .rm. We also characterize the incentives of the in-novative 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.
Subjects: 
pharmaceuticals
R&D activities
me-too drugs
breakthrough drugs
incremental innovation
radical innovation
JEL: 
I10
Document Type: 
Working Paper
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