Innovation and antibiotic use within antibiotic classes: Market incentives and economic instruments

• Market and socially optimal innovation incentives differ within antibiotic classes.
• The innovator's opportunity cost depends on the generic pressure on resource.
• A tax and subsidy scheme alone cannot induce the optimal use of antibiotics.

We analyze a monopolist's incentive to innovate a new antibiotic which is connected to the same pool of antibiotic treatment efficacy as is another drug produced by a generic industry. We outline the differences of antibiotic use under market conditions and in the social optimum. A time- and state-dependent tax-subsidy mechanism is proposed to induce the monopolist and generic industry to exploit antibiotic efficacy optimally.