Author(s)
Daron Acemoglu and Joshua Linn
Source
Quarterly Journal of Economics, Vol 119, pp. 1049-1090, 2004
Summary
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
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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.
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Current market size and market size projected five to ten years in the future have the biggest effect on research.
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Whether generic drug are developed does not change the results.
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Bringing a generic drug to market does not involve research costs, but it does involve costs of ramping up to production.
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Changes in health care coverage such as changes in Medicaid rules do not affect these results.