Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry
59 Pages Posted: 21 Oct 2003
Date Written: September 2003
This paper investigates the effect of (potential) market size on entry of new drugs and pharmaceutical innovation. Focusing on exogenous changes driven by U.S. demographic trends, we find that a 1 percent increase in the potential market size for a drug category leads to a 4 to 6 percent increase in the number of new drugs in that category. This response comes from both the entry of generic drugs and new non-generic drugs, and is generally robust to controlling for a variety of non-profit factors, pre-existing trends, and changes in health care coverage.
Keywords: Economic Growth, Entry, Innovation, Pharmaceuticals, Profit Incentives
JEL Classification: O31, O33, L65
Suggested Citation: Suggested Citation