This chapter presents a “history-friendly” model of the evolution of the pharmaceutical industry, and in particular of the so-called golden age. This industry is an ideal subject for such an analysis, especially because it has characteristics and problems that provide both contrasts and similarities with the computer industry. Like computers, the pharmaceutical industry has traditionally been a highly R&D and marketing-intensive sector and it has undergone a series of radical technological and institutional “shocks.” However, despite these shocks, the core of the leading innovative firms and countries has remained stable for a very long period of time. Entry by new firms has been a rather rare occurrence until the advent of biotechnology. However, while the evolution of computers coincides largely with the history of very few firms, that of pharmaceuticals involves at least a couple of dozens of companies. Further, the degree of concentration has been consistently low at the aggregate level and the industry has never experienced a shakeout of producers.
We argue that the observed patterns of the evolutionary dynamics were shaped by three main factors, related both to the nature of the relevant technological regime and the structure of demand:
(1) The nature of the process of drug discovery, in terms of the properties of the space of technological opportunities and of the search procedures by which firms explore it. Specifically, innovation processes were characterized for a long time by “quasi-random” search procedures (random screening), with little positive spillovers from one discovery to the next (low cumulativeness).
(2) The type of competition and the role of patents and imitation in shaping gains from innovation. Patents gave temporary monopoly power to the innovator, but competition remained strong nevertheless, sustained by processes of “inventing around” and – after a patent expires – by imitation.
(3) The fragmented nature of the relevant markets. The industry comprises many independent submarkets, which correspond broadly to different therapeutic classes. For example, cardiovascular products do not compete with antidepressants. And, given the quasi-random nature of the innovative process, innovation in one therapeutic class typically does little to enhance innovation opportunities in other markets.