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In addition to spending a vast amount of resources on Research and Development (R and D), the pharmaceutical industry is engaged in a substantial amount of marketing of their products, through both detailing to doctors and direct-to-consumer advertising to patients.

In addition to spending a vast amount of resources on Research and Development (R and D), the pharmaceutical industry is engaged in a substantial amount of marketing of their products, through both detailing to doctors and direct-to-consumer advertising to patients. Given that the share of sales devoted to marketing is larger than the share devoted to R and D by pharmaceutical firms, there has been a substantial debate about whether there is excessive marketing and whether it could be better allocated to productive R and D. However, previous economic analysis of advertising, R and D, and intellectual property ignores the impact one has on the other, making welfare evaluations of policies that affect both R and D and marketing infeasible. Lakdawalla and Wang seek to remedy this problem by first analyzing the impact that intellectual property design has on the efficient degree of advertising by pharmaceutical firms and, vice versa, the impact advertising has on the efficient design of intellectual property. They estimate the demand and supply schedules underlying these efficiency effects using patent-expirations in the U.S. pharmaceutical markets from 19902003 as an instrument. Such expirations display the interesting pattern that--for a large share of drugs--there are output reductions post-expiration because advertising is reduced more than prices are. The authors estimate the quantitative degree to which there is excessive advertising by U.S. drug manufacturers under current intellectual property law and the degree to which current intellectual property rights are inefficiently designed because of marketing.
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Title Annotation:Conferences
Publication:NBER Reporter
Date:Jun 22, 2005
Words:246
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