Friday, March 15, 2002
3:00 PM – 4:15 PM
Saunders 515
Abstract
This paper models the research and development process in the pharmaceutical
industry. Facing both cost and production risk, the pharmaceutical firm chooses
its production plan and royalty scheme. We examine the economics of royalties
on gross and net revenues and show that when faced with only one source of
uncertainty the firm will always prefer a royalty on net revenues. However,
when both types of uncertainty are present it is possible for the firm to
be better off implementing a gross revenue scheme.