Context

The pharmaceutical industry serves a dual role in modern society. On one hand, it is a growing industry, and its output makes a direct contribution to gross domestic product (GDP). On the other, prescription drugs, this industry's major output, are an input in the production of good health. These products make an important contribution to the improvement of population health.

The purpose of this book is to investigate public policy issues in pharmaceutical innovation. In Section II we first describe the important characteristics of prescription drugs. We emphasize that these characteristics deviate from the standard conditions in a competitive market. In Section III we discuss the current performance of the pharmaceutical market. In Section IV we investigate market failures that persist in allocating research and development (R&D) resources and in the utilization of prescription drugs. In Section V we analyze the policy conflict between the economic and health sectors arising from pharmaceutical innovation. The final section discusses the structure of the book and the major content of the chapters.

Characteristics of Prescription Drugs

Prescription drugs have many complex characteristics, which, when taken together, have led to major controversies in public policy arenas, including pricing, patents, and incentives for research and development, as well as excess industry profits. Each characteristic is not unique to pharmaceuticals, but rather it is the characteristics, taken in combination, that make the industry unique.

Probabilistic Nature of Demand and Effectiveness

Prescription drugs are inputs in the production of good health.