Strategic Research and Development Investment Decisions in the Pharmaceutical Industry

Do pharmaceutical firms respond to the actions of their competitors in research and development, and if so, how much? Answering this question has implications for policies aimed at incentivizing drug development, such as greater exclusivity protections and a faster Food and Drug Administration approval process. Although such policies lead to quicker realization of profits and/or more time to earn profits, they also intensify competition, thereby reducing per-firm profits. Which effect dominates depends on the degree of competition. To this end, I estimate a dynamic investment model using Phase 3 data. Solving the new equilibrium, I find that even though an expedited process and longer periods of market exclusivity increase competitive intensity, it could prompt increased entry into Phase 3, thereby encouraging innovation.