Innovate or Imitate? Strategic Innovation Decision in the Pharmaceutical Industry

Although social welfare and firms' strategic innovation decisions are closely related through firms' innovation activities, their relationship is still left unexplored. By measuring their relationship, we unveil how firms' strategic decisions shape the overall demand structure and consumer welfare. Consequently, we empirically emphasize the role of public policy in inducing and directing innovation and shaping social welfare. We also suggest an empirical estimation structure for the study of firms' strategic innovation behavior by adapting the model of endogenous choice of product quality. The empirical focus is on the pharmaceutical industry where technological innovation has huge impact on consumer welfare.