Vertical Market, Government Regulation And Innovation Distortion: Research On Chinese Pharmacetical Industry

Pharmaceutical industry is typical an innovation-oriented high technique industry. R&D intensity is generally more than 15% in developed pharmaceutical countries, and leader pharmaceutical enterprises are almost R&D-oriented enterprises.Rely on technical innovation and intellectual property rights protection system, R&D-oriented pharmaceutical enterprises take up most market share and earn monopoly profit even by limited "blockbuster medicine". The Chinese pharmaceutical industry, in contrast, presents an inexplicable "myth" under the background of global blowing up of pharmaceutical technical innovation. On the one hand, although extremely limited R&D is invested, the industry generates considerable "new medicines" very year, looking like extremely high efficiency in medicine technical innovation. On the other hand, these "new medicines" do not have any basic attributes of original medicine. These new medicines not only are not accepted by the society, but also cause higher price of medicines and results in quickly expansion of medical spending, what triggers widely social blames. Even so, the pharmaceutical industry also does not benefit from so called technical innovation and "new medicine".Under the special medical health system of China,80% medicines are sold through medical service institutions. Together with intrinsic demand of "medicine raises medical service", the medical service institutions have strong motivation to maximize its own benefit, distorting medicine demand structure and generating over demand of high price medicines. Then, these distortions are transmitted to the upstream pharmaceutical industry because of monopoly power of downstream medical service institutions, which triggers even more distortions including technical innovation. In these series of processes, government regulation failure acts as premises and tunnels for the realization of distortions. Therefore, vertical market theory and government regulation theory are powerful to interpret technical innovation distortion in Chinese pharmaceutical industry.Theoretical model is constructed under the background of C-M vertical market structure to study the relationship between government regulation and innovation incentives. Results show that not only monopoly power of medical service institution in the vertical market and government regulation cause innovation distortion respectively, but also complicate the situation after the two factors work together. Consequence is that vertical innovation is extruded out and horizontal innovation becomes the mainstream of pharmaceutical technology innovation, flooding the market with illusive new medicines. Through horizontal innovation, more benefits are achieved since the cost is far less than vertical innovation but the profits are almost the same as it, consumers become the ultimate undertaker of the cost of innovation distortion. Empirical studies based on provincial panel data and national time series data show further evidences of the conclusion, both results show that in the vertical market structure of Chinese pharmaceutical industry, buyer's monopoly power from downstream medical service institutions and government price regulation are negative factors for technical innovation of upstream pharmaceutical industry.Therefore, it is precisely because of existence of buyer's monopoly power of downstream medicine service institution and government regulation frailer act as the role of tunnel, horizontal innovation together with "medicine raises medical service" regime proceeds without hindrance, the Gresham's Law plays a part in Chinese pharmaceutical industry driving real technical innovation out and illusive innovation dominates the whole market. Industry innovation efficiency and society justice both decline heavily. Therefore, for policy suggestions, effective prescription for Chinese pharmaceutical industry technical innovation to be back on track is to deepen regulation regime reform and rebuild market order, weakening the buyer's monopoly power and reconstitution government regulation regime are important direction.