Product Hopping and Innovation Incentives

Download or read book Product Hopping and Innovation Incentives written by Jorge Lemus and published by . This book was released on 2019 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study innovation incentives in the presence of "product hopping," whereby the incumbent patents a minor modification of a drug (e.g., a new delivery method) and invests in marketing to switch demand towards the minor modification. In our setting firms compete sequentially to discover two innovative drugs. The winner of the first R&D race (the incumbent) can alter the market structure that follows the second R&D race through product hopping. This can increase investments during the second R&D race when product hopping softens competition or when the incumbent benefits from becoming a multi-product monopolist. The change in expected continuation values can increase or decrease investments during the first R&D race. Thus, the welfare effect of product hopping is ambiguous. We discuss our results in the context of the current policy debate on product hopping, welfare, and antitrust.