Market failure in the diffusion of cliniciandeveloped innovations: The case of off-label drug discoveries

Medical doctors occasionally discover potentially valuable new off-label uses for drugs during their clinical practice. They apply these to help their own patients, but often have minimal incentives to invest in diffusing them further. Thus, the benefits that other clinicians might obtain are to some extent an externality from the perspective of the discoverer. This represents a form of market failure: effort invested in diffusion could lower adoption costs for many, but few innovators will invest that effort and social welfare will be accordingly reduced. In this study we explore for empirical evidence for the market failure just described, and do find evidence for it. In a sample of US clinicians, diffusion efforts increase the diffusion of generally valuable discoveries, but innovating clinicians typically invest little to support diffusion. We conclude with a discussion of how such a market failure
could be addressed.