When is Prevention More Profitable than Cure? The Impact of Time-Varying Consumer Heterogeneity

45 Pages Posted: 9 Mar 2013 Last revised: 12 Mar 2013

See all articles by Michael Kremer

Michael Kremer

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER); Center for Global Development; Harvard University - Harvard Kennedy School (HKS)

Christopher M. Snyder

Dartmouth College - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2013

Abstract

We argue that in pharmaceutical markets, variation in the arrival time of consumer heterogeneity creates differences between a producer's ability to extract consumer surplus with preventives and treatments, potentially distorting R&D decisions. If consumers vary only in disease risk, revenue from treatments--sold after the disease is contracted, when disease risk is no longer a source of private information--always exceeds revenue from preventives. The revenue ratio can be arbitrarily high for sufficiently skewed distributions of disease risk. Under some circumstances, heterogeneity in harm from a disease, learned after a disease is contracted, can lead revenue from a treatment to exceed revenue from a preventative. Calibrations suggest that skewness in the U.S. distribution of HIV risk would lead firms to earn only half the revenue from a vaccine as from a drug. Empirical tests are consistent with the predictions of the model that vaccines are less likely to be developed for diseases with substantial disease-risk heterogeneity.

Suggested Citation

Kremer, Michael R. and Snyder, Christopher M., When is Prevention More Profitable than Cure? The Impact of Time-Varying Consumer Heterogeneity (March 2013). NBER Working Paper No. w18862. Available at SSRN: https://ssrn.com/abstract=2230752

Michael R. Kremer (Contact Author)

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