Title: Market size in innovation
Description: This paper investigates the effect of (potential) market size on entry of new drugs and pharmaceutical innovation. Focusing on exogenous changes driven by U.S. demographic trends, we find that a 1 percent increase in the potential market size for a drug category leads to a 4 to 6 percent increase in the number of new drugs in that category. This response comes from both the entry of generic drugs and new non-generic drugs, and is generally robust to controlling for a variety of non-profit factors, pre-existing trends, and changes in health care coverage. Keywords: Economic Growth, Entry, Innovation, Pharmaceuticals, Profit Incentives. JEL Classifications: O31, O33, L65.
Subjects: Pharmaceutical industry, Technological innovations, Economies of scale