The Pharmaceutical Industry

The pharmaceutical industry raises unique economic questions because of three related features. First, the high rate of R&D, technical change and importance of patent protection raise important positive and normative questions related to industry structure, prices, profits and public policy. Second, the industry is heavily regulated in all major functions. Early regulatory 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 joint costs. This creates incentives for national free-rider strategies, whereas socially optimal policies should consider cross-national spillovers and optimal price differentials. Existing literature provides a framework and some empirical evidence on some of these issues, but many questions remain unanswered. JEL classification: L1, L4, L5, I11, L65, K32