Innovation and market structure in the dynamics of the pharmaceutical industry and biotechnology: towards a history-friendly model

Abstract

This paper is a first attempt at modelling the long‐term dynamics of market structure and innovation in the pharmaceutical industry in a history‐friendly way. The model examines the relationships between the nature of the search space, demand, the patterns of competition, and industry evolution in the age of random screening and in the age of molecular biology, and shows that concentration in the pharmaceutical industry is shaped by lack of cumulativeness in innovative activities and market fragmentation. The model conforms to our appreciative understanding and responds to changes in parameters concerning demand, costs, economies of scale, opportunity conditions and the relative advantages of new biotechnology firms (NBFs) vis‐à‐vis incumbents. With the exception of cost increases, the model is quite robust to these changes in its essential features: it is quite difficult to raise substantially concentration and to have NBFs displacing incumbents.