Competition,innovation and regulation in the pharmaceutical industry

This article discusses the impact of regulation on competition and innovation in the pharmaceutical industry. Prompted by concern over attempts at regulating the industry on the European level, we discuss the two basic forms of regulation which we observe to be typical, quality regulation (licencing) and price regulation. In doing so, the analysis focuses on the research segment of the pharmaceutical industry and discusses forms of competition by innovation. Following a recent paper by Nelson, the specific characteristics of competition in the pharmaceutical industry are developed as well as their welfare implications. Regulatory behavior vis-á-vis the industry is analysed in terms of a behavioral model initially proposed by Stigler, and an attempt is made to incorporate into the analysis the experience of regulation in both Europe and the United States of America.