Patricia M. Danzon
The Wharton School - University of Pennsylvania
© Copyright 1999 Patricia M. Danzon
The pharmaceutical industry raises unique economic questions because of three related features. First, the high rate of R&D, technical change andimportance of patent protection raise important positive and normativequestions related to industry structure, prices, profits and public policy.Second, the industry is heavily regulated in all major functions. Earlyregulatory requirements focused on safety and efficacy. More recently,prices, promotion and expenditures are increasingly regulated, arising out of policy concerns to control spending under social insurance programs.Optimal policies must consider trade-offs between control of moral hazard,assuring access to medical care and preserving incentives for innovation.Third, major drugs are global products and the costs of R&D are global jointcosts. This creates incentives for national free-rider strategies, whereassocially optimal policies should consider cross-national spillovers andoptimal price differentials. Existing literature provides a framework andsome empirical evidence on some of these issues, but many questions remainunanswered.
L1, L4, L5, I11, L65, K32
Pharmaceutical Industry, Regulation, Anti-trust, Health Care,R&D, Insurance
The pharmaceutical industry is of interest to the field of law and economicsfor two, related, reasons. First, the usual issues of structure, conduct andperformance when applied to the pharmaceutical industry must take intoaccount its unusually high rate of R&D, which implies a high rate of technical change, critical importance of patent protection, potential formarket power and novel price and product competitive strategies. This raisesinteresting positive and normative issues related to prices, profits and publicpolicy.Second, the industry is heavily regulated in all major functions. Much of the early regulation and early economic literature focused on regulationrelated to safety and efficacy. Because pharmaceuticals may entail