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.