Towards a History Friendly Model of Innovation, Market Structure and Regulation in the Dynamics of the Pharmaceutical Industry: the Age of Random Screening

In this paper we present a model of the long term dynamics of market structure and innovation in the pharmaceutical industry in a history friendly way. Our results show a strong increase in concentration in each therapeutic area, but a rather low level of concentration in the overall market. Innovative firms continue to maintain a key role. Both demand growth and increase in technological opportunities have similar effects on the role of innovative firms, exploration and total quality, but a contrasting effects on concentration (positive for demand growth, and less so for technological opportunities). We have also explored different situations of patent protection. As expected, an increase in patent protection increase concentration but decreases exploration, while the opposite holds for no patent protection. Interestingly enough, an increase in patent protection is not able to countervail the negative effects of no growth in demand as far as quality and exploratory activities are concerned. Finally, an increase in the cost of research or in the stringency of approval procedures have quite different effects on concentration, exploration and quality: the first increases concentration and reduces quality, the second does not affect concentration, but affects negatively exploration as well as quality.