How Inefficient are Markets for Technology?

Previous literature shows that contracting frictions may preclude valuable cooperation between innovators and commercializers in Markets for Technology. This literature, however, does not address the question of how large the implied inefficiency is. Focusing on licensing-based cooperation in the pharmaceutical industry and the enactment of the Medicare Part D program (which implied a large downstream demand shock for selected technologies), we provide evidence suggesting that efficiency is not severely undermined in this market. Our results suggest that while contracting frictions preclude some cooperation; they do not do so for the 75% of technologies for which potential gains of cooperation are the largest. The implied efficiency burden is therefore much lower than what could be estimated based on the number of “failed cooperation deals” alone. Our results further document a vigorous, short-termed cooperation response to the program’s enactment, suggesting that commercializers may effectively perform the intermediary role of sourcing from the Market for Technology to satisfy consumer demand.