When Is Prevention More Profitable than Cure? The Impact of Time-Varying Consumer Heterogeneity

NBER Working Paper No. 18862

Issued in March 2013

NBER Program(s):Economic Fluctuations and Growth, Health Care



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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w18862

Published: Preventives Versus Treatments* Michael Kremer and Christopher M. Snyder The Quarterly Journal of Economics (2015) 130 (3): 1167-1239. doi: 10.1093/qje/qjv012

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