Volume 5, Issue 1

This paper considers the drivers of the structure and evolution of the life sciences innovation system, a remarkable success story for public support of science. The growth and performance of this system reflect the interaction between abundant scientific and technological opportunity, a reasonably effective and adaptive institutional and property rights framework, and a reservoir of unmet demand for therapies and technologies that significantly enhance human health care. Examining the evolution and dynamism of the life sciences innovation system, we emphasize three central foundations: a long-term and relatively stable commitment of financial and human resources by both the public sector and for-profit organizations, market and non-market institutions that encourage competition on the basis of innovation across multiple dimensions, and the promise of significant financial rewards for private sector innovators leveraging publicly funded scientific discoveries.

Price discrimination is an extremely common type of pricing strategy engaged in by virtually every business with some discretionary pricing power. The issue of whether price discrimination reduces or increases social welfare has been considered by economists since at least 1920. At that time, it was demonstrated that, under certain (restrictive) conditions, price discrimination will reduce social welfare. Subsequent research has shown that price discrimination can increase social welfare, and that a necessary (but not a sufficient) condition for welfare to rise is that total output with discrimination exceeds the no-discrimination level.First, we present evidence about international drug price differentials. Drug prices in the top 5 countries are almost five times as high as they are in the bottom five countries. Certain features of the drug price distribution are surprising. For example, according to our drug price index, the price of drugs in Mexico (which has the second-highest drug prices) is 24% higher than it is in the U.S. (which ranks sixth out of 38 countries). There is a highly significant positive correlation between per capita income and the drug price index: on average, the price of drugs is lower in low-income countries. However, there are large deviations from the regression line. Countries (particularly low-income countries) with similar levels of income pay vastly different prices for drugs.Next, we examine income-related price differentials in the U.S. When price is defined as the amount paid by the patient, there is an inverted-U-shaped relationship between income and price. People in the lowest income category pay 25% less than high income people (16% less if cases when the patient paid nothing are excluded), but people in the middle income category (whose income is 125-200% of the poverty line) pay 6% more than high income people (whose income exceeds 400% of the poverty line).We perform an empirical investigation of whether the necessary condition for price discrimination to increase welfare—that it increase total output—is satisfied in the case of international pharmaceutical prices, by analyzing the relationship across drugs between total output growth and growth in international price dispersion. Drugs that had larger increases in international price dispersion had larger increases in total utilization, controlling for the growth in the mean price of the drug and the drug's vintage. Numerous studies have shown that increased prescription drug use results in improved health outcomes, or the converse: reductions in drug use result in worse health outcomes, such as higher risk of hospitalization and death.In addition to increasing the output of existing products, the ability to engage in price discrimination is likely to increase the number of new products. Contrary to the assumptions of some theoretical models, some markets that would not be served under uniform pricing will be served under price discrimination. This would be the case whenever there are fixed production costs, and the pharmaceutical industry has much higher fixed costs (especially R&D expense) as a percentage of sales than most other industries. Studies have shown that the amount of pharmaceutical R&D investment is influenced by factors (other than the ability to price discriminate) that determine the expected profitability of investment. Studies have also provided evidence that the development and use of new drugs has resulted in significant increases in longevity and health, and that overall, new drugs have been highly cost-effective.

Throughout its history, the United States has been the beneficiary of a worldwide in-migration of entrepreneurial talent. This article surveys finance, one of the many sectors in which immigrants made a conspicuous impact. Part I demonstrates the dominant role of immigrants in forming public financial policies from 1775 to 1817. Part II surveys 12 merchant and investment banking firms founded during the nineteenth century by individual immigrants or family groups, and traces their histories until 1914. Part III suggests, from this small sample, a series of hypotheses and tentative conclusions about their experiences and influence. Part IV compares the financial environment of the nineteenth century with that of the late twentieth and early twenty-first centuries. The article ends with a supporting appendix that describes 19 additional immigrants or immigrant families and their firms.