Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26478
Authors: 
Brekke, Kurt R.
Straume, Odd Rune
Year of Publication: 
2008
Series/Report no.: 
CESifo working paper 2433
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.
Subjects: 
Marketing
Research & Development
pharmaceutical
JEL: 
I11
L13
O31
Document Type: 
Working Paper

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