Innovation and Market Structure in Pharmaceuticals: an Econometric Analysis on Simulated Data

This paper presents an econometric analysis of the results generated by a “history-friendly” model of the evolution of the pharmaceutical industry. This systematic statistical investigation allows us to strengthen and further control for sensitivity and robustness of previous results using a model of the pharmaceutical industry and of their interpretations. In so doing, this paper hopefully contributes also to the broader methodological discussion about the validation of simulated, Agent Based, models. Our history-friendly model examines the so-called “golden age” or “random screening” era of the pharmaceutical industry. In particular, we focus our attention on a suggested interpretation of a set of stylised facts characterising the evolution of this industry which the model is able to replicate. Specifically, despite being traditionally a high R&D and marketing intensive sector, pharmaceuticals has been consistently showing low level of concentration over its whole history. Yet, adding to the puzzle, the industry has been dominated by a core of innovative firms which has remained quite small and stable for a very long period of time, suggesting the existence of first mover advantage