Product Hopping and Innovation Incentives

We study innovation incentives under product hopping, whereby an incumbent patents a minor modification of a pioneer drug (for example, a new delivery method) and promotes the modified version to shift demand from the original drug. We develop a model in which an incumbent races against an entrant to discover a drastic innovation. We show that product hopping can decrease the total research and development (R&D) investment for drastic innovation. Moreover, an incumbent only chooses to engage in product hopping when drastic innovation is sufficiently difficult. Although product hopping may boost ex-ante R&D for pioneer drugs, it comes at the expense of decreasing R&D for subsequent drastic innovations and consumer surplus through socially wasteful marketing expenses. Our results contribute to the policy debate on product hopping, welfare, and antitrust.

Automated summary

This study examines innovation incentives under product hopping and provides some conclusions through modeling. Product hopping can decrease the total R&D investment for drastic innovation, and incumbents engage in product hopping only when drastic innovation is sufficiently difficult. Although product hopping may increase R&D for pioneer drugs, it also reduces R&D for subsequent drastic innovations and leads to socially wasteful marketing expenses.