Template-Type: ReDIF-Paper 1.0
Author-Name: Michael Kremer
Author-Person: pkr20
Author-Name: Christopher Snyder
Author-Person: psn35
Title: When is Prevention More Profitable than Cure?
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.
Creation-Date: 2013-01
Classification-JEL: O31, L11, I18, D42
Keywords: Pharmaceuticals, Vaccines, Drugs
Number: 46
Handle: RePEc:glh:wpfacu:46
File-Url: https://growthlab.hks.harvard.edu/sites/projects.iq.harvard.edu/files/growthlab/files/cid_working_paper_252.pdf
File-Format: application/pdf