The dynamic of prices, innovation and R&D contrasts the drug market with other high technology markets where innovative products can be simultaneously more efficient and less expensive. The dynamic of innovation is in fact very different in the drug industry compared to other fields:

- the manufacturing costs are low so that substancial price decreases cannot be expected from larger series,

- in turn, markets sizes doesn't necessarily grow as prices fall. Even if the price elasticity for drugs is more than zero, the size of the market is obviously limited for medical reasons. We won't all turn to calcium inhibitors just because their price is falling down.

A distinctive feature of the pharmaceutical industry is that new products do not necessarily rule out old products. Diuretics and beta-blockers are always prescribed in hypertension despite the apparition of ACE inhibitors and calcium inhibitors. Old products may be attractive because of their widely tested safety.

The generics market can besides give a second life to these products, with new manufacturers, new promotion, etc. So, the commercial life of innovative products is squeezed between the increasing length of development time and the growing generic markets. Although it remains very long compared to other industrial products, the life cycle of drugs tends to diminish. This is a contributing factor to high prices.

A key factor is the nature of competition in the drug market. According to sub-markets and regulation price regimes, a variety of situations can be found ranging from the pure price competition to the pure monopoly, passing through various forms of monopolistic competition (Table 2).

TABLE 2. - The nature of competition in pharmaceutical industry

Pure price competition only predominates in the generics market, provided the prices are free. In regulated price countries in fact, generic drugs cannot fully take advantage of their low price strategy for several reasons:

- patented drugs prices are already low,
- the price difference between patented products and their generic may not be substantial,
- government rather than companies appears to be responsible for low prices.

The law of generic drugs is simple: the generic market is developed wherever the price are - or were - free. Nevertheless, the rule in the drug market is non price competition.

Monopolistic competition is certainly the dominant form in the ethic drug market, where products compete trough their differentiated bundle of characteristics. Until these last years price was not a relevant characteristic for competition, at least in Europe. Patents do not create monopoly situations but rather monopolistic competition situations. In fact the effect of patents is only to prevent pure price competition.

Pure monopoly prevails in the case of important innovation, at least during a limited period of time before comparable - but not identical - products arrive. High technology products are the most likely to be in monopoly situation. In the US for instance, many biotech products have benefited from the Orphan Drug Act which confers a seven years exclusive protection (Table 3). It is a universal economic law that monopoly involves high prices compared to competitive markets. The ODA protection and the high prices of many of these innovative drugs have thus raised some protestations against the «orphans billionaire», leading to a probable revision of the 1983 legislation.

TABLE 3. - Some biotech products considered as orphan drugs in the USA