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Pharmaceutical Patents: Incentives for Research and Development or Marketing?
Author(s) -
Brekke Kurt R.,
Straume Odd Rune
Publication year - 2009
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/sej.2009.76.2.351
Subject(s) - incentive , distribution (mathematics) , affect (linguistics) , product (mathematics) , business , new product development , market share , industrial organization , pharmaceutical industry , marketing , microeconomics , advertising , economics , microbiology and biotechnology , mathematical analysis , linguistics , philosophy , geometry , mathematics , biology
We analyze how a patent‐holding pharmaceutical firm may strategically use advertising of existing drugs to affect research and development (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.