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Compulsory licenses in the pharmaceutical industry: Pricing and R&D strategies

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  • Sarmah, Archita
  • De Giovanni, Domenico
  • De Giovanni, Pietro

Abstract

A pharma manufacturer enters a developing country with a new drug after investing some R&D in the first period. The firm can be subjected to a compulsory license mechanism that allows a generic manufacturer to produce an imitated version of the patented product in exchange of a fixed royalty. When the patent expires, a traditional price competition ensues between the patent-holder and the generic manufacturer. We compare two deterministic scenarios wherein the patent-holder has full information regarding the compulsory license. We identify the conditions under which the license is socially and economically beneficial. Our analyses suggest that the patent-holder is seldom economically better-off. We next model a stochastic compulsory license decision rule whereby the patent-holder is exposed to a certain probability that the compulsory license is issued. We show that uncertainty renders the patent-holder more willing to operate in that market.

Suggested Citation

  • Sarmah, Archita & De Giovanni, Domenico & De Giovanni, Pietro, 2020. "Compulsory licenses in the pharmaceutical industry: Pricing and R&D strategies," European Journal of Operational Research, Elsevier, vol. 282(3), pages 1053-1069.
    • Handle: RePEc:eee:ejores:v:282:y:2020:i:3:p:1053-1069
    DOI: 10.1016/j.ejor.2019.10.021
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