Incentives for clinical trials

It is often argued that drug companies do not wish to carry out post-approval head-to-head clinical trials, since their drugs may be revealed as being no better than existing drugs. However, we show that standard models for vertical differentiation predicts that pharmaceutical companies would in fact benefit from carrying out voluntary post-approval clinical trials: the elimination of quality uncertainty increases expected product differentiation, thereby raising prices for both high-quality and low-quality drugs. It is, however, to the disadvantage of consumers that trials are carried out. By extending the analysis to the case when prices cannot be raised, once the drug has been introduced on the market, we incorporate a prevalent feature of US and European markets. When prices cannot be raised, the entrant drug firm producing the new drug, no longer has incentives to carry out post-approval clinical trials.