Monday, February 28, 2011
History-Friendly Model of the Evolution of the Pharmaceutical Industry: Technological Regimes and Demand Structure
Posted by D. Daniel Sokol
Christian Garavaglia (University of Milano-Bicocca, Faculty of Statistics - KITeS, Bocconi University, Milan, Italy), Franco Malerba (KITeS, Bocconi University, Milan, Italy - Bocconi University, Department of Economics), Luigi Orsenigo (KITeS, Bocconi University, Milan, Italy - DIMI, University of Brescia), and Michele Pezzoni (KITeS, Bocconi University, Milan, Italy - DIMI, University of Brescia) have a new paper on History-Friendly Model of the Evolution of the Pharmaceutical Industry: Technological Regimes and Demand Structure.
ABSTRACT: This paper examines how the nature of the technological regime governing innovative activities and the structure of demand interact in determining market structure, with specific reference to the pharmaceutical industry. The key question concerns the observation that - despite high degrees of R&Dand marketing-intensity - concentration has been consistently low during the whole evolution of the industry. Standard explanations of this phenomenon refer to the random nature of the innovative process, the patterns of imitation and the fragmented nature of the market into multiple, independent submarkets. We delve deeper into this issue by using an improved modified version of our previous “history-friendly” model of the evolution of pharmaceuticals. Thus, we explore how changes in the technological regime and/or in the structure of demand may generate or not substantially higher degrees of concentration. The main resu! lts are that, while technological regimes remain fundamental determinants of the patterns of innovation, demand structure plays indeed a crucial role in preventing the emergence of concentration through a partially endogenous process of discovery of new submarkets. However, it is not simply market fragmentation as such that produces this result, but rather the entity of the “prize” that innovators can gain relative to the overall size of the market. Similarities and differences with other approaches are also discussed.