The Pollution of Antibiotics, and Why Pharmaceutical Companies Might Care About Antibiotic Resistance

Derek Gurney
Economics
Stanford University
November 2002

Antibiotic resistance--the inability of an antibiotic to kill a strain of bacteria--threatens medicine's ability to treat bacterial infections, so much so that people have died from infections that would have once been curable. I study the economics of this problem, particularly how resistance effects the incentives of pharmaceutical companies to enter--to begin to produce for sale--in markets for antibiotics.

Improper incentives are one of the causes of pollution as we normally think of it: the degradation of natural resources by producers or consumers without consideration of the societal costs. For example, because drivers feel only a portion of the societal impact of the pollution they create, they drive more than is optimal from a societal perspective. In the same way, because car makers do not directly feel the effects of air pollution created by the vehicles they make, they do not include those effects in their decisions about vehicle production.

Antibiotic resistance can be thought of as pollution because it similarly involves the degradation of a societal resource. When an individual takes a course of antibiotics for an infection, she creates in her body an environment where bacteria that are resistant to the antibiotic are favored, in reproductive terms, over the susceptible bacteria. If the resistant bacteria survive the course of treatment while the susceptible bacteria are killed, any bacteria that spread to other people are resistant. Repetition of this process can eventually create a situation where the majority of bacteria are resistant and the antibiotic used to cure the infection is ineffective. Consequently, just as the atmosphere can choke with pollution due to excessive driving, antibiotics can become ineffective with excessive consumption. Moreover, just as drivers ignore the effect of their own exhaust, individual consume antibiotics without considering that it increases the likelihood of antibiotic resistance for everyone.

However the analogy with pollution does not necessarily carry over to the production side. Unlike with vehicle makers and air pollution, antibiotic manufacturers may have an incentive to act in such a way that, given its impact on antibiotic resistance, the use of antibiotics is appropriate. The reason for this is that antibiotic use today leads to antibiotic resistance tomorrow, and antibiotic resistance decreases the demand for antibiotics. As a result, sales today come at the expense of sales tomorrow, leading a profit-seeking firm to consider the impact of its actions on antibiotic resistance due to the impact of profits in the future. In fact, if there were only one manufacturer of antibiotics and that firm had, through the patent system, a perpetual right of monopoly, economic theory suggests that the firm would act in society's interest to prevent antibiotic resistance.

However, while new antibiotics, like all drugs, are protected from competition by patents, this protection does not last forever. Instead, after patent expiration, generic manufacturers can enter the market, where, as with any drug, each firm's production will increase the supply to the market, lower the price for all firms, and thus decrease their profits . With antibiotics, each firm's production will, in addition, impose further costs on the other firms: increasing the likelihood of bacteria becoming resistant to the antibiotic, thus decreasing its demand and thereby lowering each firm's profits.

If this situation can be anticipated by an outside observer, industry insiders surely consider it too. As a result, one should observe pharmaceutical manufacturers react to this potential by entering into antibiotics markets in fewer numbers than other drug markets (all else being equal). My research currently focuses on detecting whether this is indeed the case. If it is, the problem of antibiotic resistance may not need the same sort of regulation that other forms of pollution do.