Scherer, F.M. "Markets and Uncertainty in Pharmaceutical Development." KSG Faculty Research Working Paper Series RWP07-039, September 2007.

Abstract

This paper, written for a conference on biomedical innovation at the University of Kiel, examines the theory of induced innovation, with science-push and demand-pull variants, in the context of pharmaceutical R&D. It explores how the theory applies under varying market structure, uncertainty, and behavioral (i.e., rent-seeking vs. secure profit maximization) conditions. The paradox of high gross margins but only mildly supra-normal returns on investment in the pharmaceutical industry is consistent with the pursuit of parallel research paths under uncertainty, rent-seeking, and cannibalization hypotheses. Parallel paths strategies carried implicitly to near-zero profit equilibria by firms competing for monopoly positions may approach social optimality, given plausible differences between private and social returns. But evidence on whether this outcome is actually approximated remains scarce.