Second, under these general conditions, we show that the incumbent has an incentive to strategically overinvest in advertising in order to negatively affect R&D investments and thereby protect its existing patent rent. The key mechanism in the relationship between advertising and R&D incentives is the incumbent's ability to influence ex post payoffs of the potential entrant through ex ante advertising of the existing product.
We conclude that, under reasonable assumptions, socially excessive advertising is more likely to occur if there is a stronger persuasive element to advertising, and/or if the patent rent is higher (due to either longer patent periods or a higher regulated drug price).
Using numerical simulations, we also demonstrate that a generous patent system (equivalently, generous drug prices) tends to stimulate marketing incentives relative to R&D incentives, and finally, that our conclusions from the general welfare analysis about the relationship between patent rent and advertising incentives are strongly confirmed, even in a setting where advertising is purely informative.
However, a higher price--or, generally, a more generous patent protection--implies that a larger share of the patent rent is spent on marketing, relative to R&D.
To be sure, patent rents are typically earned over the
the net present value of future patent rents. The market (or, more
reward mechanisms because patent rents are closely correlated with