Economic Welfare and the Production of Information by a Monopolist: The Case of Drug Testing

Abstract

This paper uses a specific model to analyze a monopolist's incentives to produce information about a consumer product. The particular example considered is testing of a therapeutic drug whose probability of undesirable side effects is not precisely known. The main result of the paper is that ex post pricing latitude by a monopolist (after the results of drug testing are in) encourages greater testing than would occur under rigid pricing. It is also shown that the socially optimal amount of testing is less under such responsive pricing than under rigid pricing.