Incentives for Clinical Trials

Who gains from more information on the quality of pharmaceutical drugs? Are there incentives for voluntary post-approval clinical trials among pharmaceutical companies? Contrary to popular belief, this paper shows that it is not in the consumer interest that clinical evidence establishing the relative e¤ectiveness within a class of drugs are produced. Pharmaceutical companies, on the other hand, do bene…t: the elimination of uncertainty regarding quality increases expected product di¤erentiation, thereby raising prices for both high-quality and low-quality drugs, to the disadvantage of consumers. Still there is no unique equilibrium where the market provides clinical trials. If the costs of carrying out clinical trials are small, in relative terms, there will be a coordination problem between …rms, as …rms will want a rival …rm to carry the cost. If the costs are large they will be prohibitive. Legislation that obligates entering …rms to carry out post-approval trials is bene…cial for …rms if it solves the coordination problem, but is otherwise harmful. Legislation is never in the interest of consumers. Key words: Quality uncertainty, Symmetric information, Pharmaceutical market, Clinical trial JEL-codes: D81, D83, I18, L15 Centre for Health Economics, Department of Economics, Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden, e-mail: [email protected] Pharmaceutical Bene…ts Board, P.O. Box 55, SE-171 11 Solna, Sweden, e-mail: [email protected]