Abstract
Pricing of biotechnology innovation under a patent grant is reconsidered in a model with uncertain returns and irreversible costs and benefits. Past results on restricted monopoly pricing in the presence of competing technologies showed that pricing power is reduced. The timing of adoption of an innovation is delayed and the pricing power of the restricted monopolist is further reduced when uncertainty and irreversibility is considered. The presence of irreversible benefits results in increased willingness-to-pay for the innovation, accelerating adoption, and increasing the innovator's restricted monopolist pricing power. Using Monte-Carlo simulation, the quantitative effects were approximated by a linear function through the hyper-plane.
Notes
The relative willingness to pay includes changes in the value of the alternative technology induced by strategic responses of vendors of those technologies or their components, e.g. price changes for pesticides for non-transgenic crops. In general, recall
The motivation for choosing the risk-adjusted rate of return is that the risk of the additional benefits could be tracked with a dynamic portfolio of market assets.