ESTIMATING THE ALLOCATIVE INEFFICIENCY IN THE PRESCRIPTION DRUG-INDUSTRY

The economic organization of the pharmaceutical industry is profoundly affected by the patent system, which provides a temporary monopoly as an incentive for innovation. The consensus of industry observers has been that potential benefits from stimulating pharmaceutical innovatio n are large and very difficult to estimate, while the costs of monopol y power are relatively modest. We argue that the use of accounting pro fits to estimate social costs of monopoly has led to serious underesti mates of those social costs. In this paper we use sales estimates for individual drugs from survey data published by IMS America Ltd to esti mate dead weight loss (DWL) per dollar of sales for several prescripti on drugs. We estimate that for the drugs we study there is $5 billion of DWL on the $8 billion of sales.