SSE/EFI Working Paper Series in Economics and Finance
No 636:
Incentives for Clinical Trials
Erik Grönqvist ()
and Douglas Lundin ()
Abstract: Who gains from more information on the quality of
pharmaceutical drugs? Are there incentives for voluntary post-approval
clinical trials among pharmaceutical companies? Contrary to popular belief,
this paper shows that it is not in the consumer interest that clinical
evidence establishing the relative effectiveness within a class of drugs
are produced. Pharmaceutical companies, on the other hand, do benefit: the
elimination of uncertainty regarding quality increases expected product
differentiation, thereby raising prices for both high-quality and
low-quality drugs, to the disadvantage of consumers.
Still there is no
unique equilibrium where the market provides clinical trials. If the costs
of carrying out clinical trials are small, in relative terms, there will be
a coordination problem between firms, as firms will want a rival firm to
carry the cost. If the costs are large they will be prohibitive.
Legislation that obligates entering firms to carry out post-approval trials
is beneficial for firms if it solves the coordination problem, but is
otherwise harmful. Legislation is never in the interest of consumers.
Keywords: Quality uncertainty; Symmetric information; Pharmaceutical market; Clinical trials; (follow links to similar papers)
JEL-Codes: D81; D83; I18; L15; (follow links to similar papers)
23 pages, September 25, 2006
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