Paying off the Competition: Contracting, Market Power, and Innovation Incentives
72 Pages Posted: 30 Jun 2021 Last revised: 31 Oct 2024
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Paying off the Competition: Contracting, Market Power, and Innovation Incentives
Paying Off the Competition: Contracting, Market Power, and Innovation Incentives
Date Written: June 19, 2021
Abstract
This paper explores the relationship between a firm's legal contracting environment and its innovation incentives. Using granular data from the pharmaceutical industry, we examine a contracting mechanism through which incumbents maintain market power: ``pay-for-delay'' agreements to delay the market entry of competitors. Exploiting a shock where such contracts become legally tenuous, we find that affected incumbents subsequently increase their innovation activity across a variety of project-level measures. Exploring the nature of this innovation, we also find that it is more ``impactful’’ from a scientific and commercial standpoint. The results provide novel evidence that restricting the contracting space can boost innovation at the firm level. However, at the extensive margin we find a reduction in innovation by new entrants in response to increased competition, suggesting a nuanced effect on aggregate innovation.
Keywords: Drug Development, Pharmaceutical Industry, Contracting, Monopoly, Antitrust, Market Power, Competition, Innovation
JEL Classification: D42, D43, G31, K21, L41, L43, L65, O31, O32
Suggested Citation: Suggested Citation