Working Paper: NBER ID: w18862
Authors: Michael Kremer; Christopher M. Snyder
Abstract: We argue that in pharmaceutical markets, variation in the arrival time of consumer heterogeneity creates differences between a producer's ability to extract consumer surplus with preventives and treatments, potentially distorting R&D decisions. If consumers vary only in disease risk, revenue from treatments--sold after the disease is contracted, when disease risk is no longer a source of private information--always exceeds revenue from preventives. The revenue ratio can be arbitrarily high for sufficiently skewed distributions of disease risk. Under some circumstances, heterogeneity in harm from a disease, learned after a disease is contracted, can lead revenue from a treatment to exceed revenue from a preventative. Calibrations suggest that skewness in the U.S. distribution of HIV risk would lead firms to earn only half the revenue from a vaccine as from a drug. Empirical tests are consistent with the predictions of the model that vaccines are less likely to be developed for diseases with substantial disease-risk heterogeneity.
Keywords: Prevention; Cure; Consumer Heterogeneity; Pharmaceutical Markets
JEL Codes: D42; I18; L11; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumer heterogeneity in disease risk (D11) | Firms' ability to extract consumer surplus from preventives (D43) |
| Firms' ability to extract consumer surplus from preventives (D43) | Bias against investing in preventives compared to treatments (D91) |
| Disease risk skewness (C46) | Revenue from treatments exceeds that from preventives (H51) |
| Revenue ratio between preventives and treatments (I11) | Distribution of disease risk (I14) |
| Distribution of disease risk (I14) | Bias against preventives (G52) |
| Consumer heterogeneity in disease risk (D11) | Potential social welfare loss from R&D distortions (O39) |
| Heterogeneity in disease risk (I12) | Likelihood of vaccine development (I15) |
| Heterogeneity in disease risk (I12) | Drug development (O32) |