Two Puzzles Resolved: Of the Schumpeter - Arrow Stalemate and Pharmaceutical Innovation Markets
58 Pages Posted: 9 Apr 2007 Last revised: 2 Jun 2013
One of the most heated discussions in economics in recent years has concerned the relationship between market structure and innovation. After a half-century of debate and innumerable studies, the consensus is that there is no clear answer to the question. On a concrete level, the uncertainty underlies the most fundamental critique of "innovation markets," or markets for research and development (R&D). After all, if concentration leads to innovation, then antitrust challenges are not appropriate even for mergers that lead to monopoly.
In this Article, I closely parse the economic studies to arrive at a more nuanced answer that highlights factors determining the ideal market structure. I show that both competition and size play a role in pharmaceutical innovation. In addition, analysis of the pharmaceutical industry rebuts the most cogent critiques of innovation markets.
The Article also includes the first empirical analysis of pharmaceutical innovation market cases. This is particularly instructive because nearly every challenge to such mergers has arisen in the pharmaceutical industry. For each of the nine cases, I examine the pre-merger treatment for particular conditions, the number of participants in the market and stage of FDA review, and the current market picture. I conclude that approximately half of the agency challenges were justified.
Finally, I propose a new test to apply to innovation markets. The test examines (1) concentration among firms reasonably likely to reach the market, (2) anticompetitive theories of innovation suppression, and rebuttals based on (3) rivals' entry, (4) efficiencies, and (5) a "Schumpeterian" need for size. The test thus replaces the current ad hoc approach with a comprehensive framework based on the Merger Guidelines. It also breaks new ground in considering not just the number of firms engaged in R&D but also the stage (both preclinical and clinical) of FDA review.
The debates concerning innovation markets and the relationship between market structure and innovation present some of the most challenging issues in economics and antitrust. My analysis of the economic studies and pharmaceutical innovation market mergers promises to solve two crucial, interrelated, puzzles.
Keywords: antitrust, innovation market, schumpeter, arrow, market structure, innovation, mergers, patents, pharmaceuticals
JEL Classification: K21, L10, L11, L12, L22, L40, L65, O31, O34
Suggested Citation: Suggested Citation