Journal
MANAGEMENT SCIENCE
Volume 55, Issue 4, Pages 539-551Publisher
INFORMS
DOI: 10.1287/mnsc.1080.0959
Keywords
health care; pharmaceuticals; innovation; marketing
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It is commonly argued that in recent years pharmaceutical companies have targeted their research and development (R&D) at small improvements of existing compounds instead of riskier drastic innovations. In this paper, we show that the bias in the pharmaceutical industry toward small innovations might be driven by the low sensitivity of the demand. In particular, small innovations get a proportionally larger reward because pharmaceutical firms target them at the inelastic segments of the demand. As a consequence, firms find it relatively more pro. table to invest in small innovations. We also study the effect on R&D incentives of marketing strategies and regulatory instruments aimed at controlling pharmaceutical expenditure.
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