Research and Competitive Product Differentiation in the Pharmaceutical Industry in the United States

Abstract

During the past two decades expenditures in the United States on research and development have expanded greatly. From outlays of the order of a half-billion dollars at the start of the Second World War, they have grown to well over $10 billion. The rapid growth of an industry of discovery ''2 has given rise to a large number of questions concerned with the role and function of industrial research. Why do firms spend large amounts on research and development ? What is the relationship between research and market structure ? What has been the impact of public policy, in the form of the patent system, on these expenditures ? In dealing with questions of this sort it is necessary to stress the pattern of relationships among firms within which research and development is undertaken. In an activity characterized by high degrees of uncertainty, we should not expect firms to invest so heavily in the absence of specific pressures. These pressures arise most frequently from oligopolistic market structures in which the need for product differentiation has been recognized and where rivalry has been limited to variables other than price. This article puts forward an analytical framework within which these questions may be considered, and also attempts to provide some answers dealing with the experience of the pharmaceutical industry in the United States.

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