The Effects of Incentives on Pharmaceutical Innovation
The Effects of Incentives on Pharmaceutical Innovation
This chapter examines the role of incentives in technological innovation in the pharmaceutical industry. Pharmaceutical companies make significant investments in research to discover and develop new and improved drug products, but not when they expect no adequate returns in advance. According to another view, certain controls, such as price controls and/or stringent utilization standards, are required to prevent companies from earning economic rents by introducing new products that result only in substantial increases in health expenditures. Patents create market power that allows pharmaceutical research firms to recoup their research and development cost, thus creating incentives for innovation. A crucial feature of the pharmaceutical sector is the large initial fixed cost of research and development and the small marginal cost of producing and distributing drugs. The chapter cites empirical evidence suggesting that incentives stimulate research and development.
Keywords: incentives, technological innovation, pharmaceutical industry, investments, economic rents, patents, research and development, marginal cost
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