Preventives Versus Treatments Redux: Tighter Bounds on Distortions in Innovation Incentives with an Application to the Global Demand for HIV Pharmaceuticals

52 Pages Posted: 17 Jan 2018

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: January 2018

Abstract

Kremer and Snyder (2015) show that demand curves for a preventive and treatment may have different shapes though they target the same disease, biasing the pharmaceutical manufacturer toward developing the lucrative rather than the socially desirable product. This paper tightens the theoretical bounds on the potential deadweight loss from such biases. Using a calibration of the global demand for HIV pharmaceuticals, we demonstrate the dramatically sharper analysis achievable with the new bounds, allowing us to pinpoint potential deadweight loss at 62% of the global gain from curing HIV. We use the calibration to perform policy counterfactuals, assessing welfare effects of government policies such as a subsidy, reference pricing, and price-discrimination ban. The fit of our calibration is good: we find that a hypothetical drug monopolist would price an HIV drug so high that only 4% of the infected population worldwide would purchase, matching actual drug prices and quantities in the early 2000s before subsidies in low-income countries ramped up.

Suggested Citation

Kremer, Michael R. and Snyder, Christopher M., Preventives Versus Treatments Redux: Tighter Bounds on Distortions in Innovation Incentives with an Application to the Global Demand for HIV Pharmaceuticals (January 2018). NBER Working Paper No. w24206. Available at SSRN: https://ssrn.com/abstract=3102024

Michael R. Kremer (Contact Author)

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