Product Innovation and the Process of Creative Destruction in the U.S. Pharmaceutical Industry

Abstract

This study investigates the relationship between industry structure and product innovation within the pharmaceutical industry. The theory of creative destruction forwarded by J. A. Schumpeter suggests that the high intensity of product innovation within the drug industry should produce rapid and dynamic shifts in market leadership. The results of this analysis indicate that the largest firms are not, at any given point in time, the most innovative. Economies of scale in R&D exist up to a finite magnitude where declining marginal returns set in. Consequently, market leaders can not be as efficient in the development of new medicines as their eventual successors, and the most innovative market challengers will displace industry leaders by virtue of sustained product innovation.