Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry

Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot


Daron Acemoglu and Joshua Linn


Quarterly Journal of Economics, Vol 119, pp. 1049-1090, 2004


This paper looks at how the number of customers for a product affects firms’ research efforts.

Policy Relevance

When there are more customers for a product, firms produce more products; government support for medicines with small markets might be helpful.

Main Points

  • Data shows that a one percent increase in the potential market size for a type of medicine leads to a four to six percent increase in the number of new drugs in that category.

  • Current market size and market size projected five to ten years in the future have the biggest effect on research.

  • Whether generic drug are developed does not change the results.
    • Bringing a generic drug to market does not involve research costs, but it does involve costs of ramping up to production.

  • Changes in health care coverage such as changes in Medicaid rules do not affect these results.

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