Interdependent Expenditures on R&D and Marketing in the Pharmaceutical Enterprise

Abstract:     
The activities of pharmaceutical companies in developing, pricing and marketing their products continues to be controversial, and literatures exist on each subject, but very little has been published modeling their joint determination. Using standard micro-economic assumptions of profit-maximization we develop a model of the decision-making process which yields an interior equilibrium, solve the model and conduct a comparative statics analysis. We find strong relationships between marketing and research expenditure. Marketing and research are not substitutes, but complements. Exogenous changes in the research environment which lead to an increase in research will lead to a more than one-for-one increase in marketing. Increasing shares of pharmaceutical costs paid directly by consumers will lead to a decrease in marketing. We conclude that empirical studies of firm behavior may yield biased results if they do not consider the simultaneous nature of the firm's decisions.

Keywords: Pharmaceutical firm, marketing and R&D

JEL Classification: D21, I11, L21

working papers series