OBJECTIVES: Recent Medicare legislation calls on AHRQ to conduct research related to the comparative effectiveness of health care items and services, including prescription drugs. This reinforces earlier calls for “practical clinical trials” involving clinically relevant treatment alternatives. We explored the decision of pharmaceutical companies to conduct such “head-to-head” comparative trials. Our objectives were to: 1). better understand the incentives and disincentives to conduct a comparative trial; 2). shed light on the hidden costs of a trial; 3). characterize the conditions under which a trial will be undertaken; and 4). identify implications for public policy. METHODS: In the context of a differentiated products oligopoly, we modeled a one-stage game involving two risk-neutral pharmaceutical companies, each of which simultaneously decides whether or not to conduct a head-to-head trial involving a direct comparison between its drug and that of the other company. RESULTS: Our model suggests that an important factor affecting a firm's decision is the potential loss in market share following a result of inferiority or comparability. This “hidden cost” is higher for the Market Leader than the Market Follower, making it less likely that the Leader will choose to conduct a trial. The model also suggests that in a full-information environment it will never be the case that both firms choose to conduct such a trial. Furthermore, if market shares and the probability of proving superiority are similar for both firms, it is quite possible that neither firm will choose to conduct a trial. Finally, our results indicate that incentives that offset the direct cost of a trial can prevent a “no-trial equilibrium”, even when both firms face the possibility of an inferior outcome. CONCLUSIONS: The generation of comparative information through the conduct of clinical trials depends greatly on private incentives, which may be subject to alteration through public policy.