Economic Analysis of Pay-for-delay Settlements and Their Legal Ruling
AbstractIn this paper, we ask whether courts should continue to rule settlements in the context of pharmaceutical claims per se legal, when these settlements comprise payments from originator to generic companies, potentially delaying generic entry compared to the underlying litigation. Within a theoretical framework we compare consumer welfare under the rule of per se legality with that under alternative standards. We find that the rule of per se legality induces maximal collusion among settling companies. In comparison, the rule of per se illegality entirely prevents collusion and the rule of reason induces limited collusion when antitrust enforcement is subject to error. Contrary to intuition, limited collusion can be welfare enhancing as it increases companies' expected settlement profits and thus fosters generic entry. Generic companies obtain additional incentives to challenge probabilistic patents, which potentially leads to overall increased competition. We further show that generic entry is fostered more effectively by inducing limited collusion than by rewarding first generic entrants with an exclusivity right.
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Bibliographic InfoPaper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 12734.
Date of creation: Feb 2012
Date of revision:
antitrust and intellectual property law; patent settlements; collusion; per se rule; rule of reason; Hatch-Waxman Act;
Find related papers by JEL classification:
- I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
- K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
- O34 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Intellectual Property Rights
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-20 (All new papers)
- NEP-COM-2012-02-20 (Industrial Competition)
- NEP-IPR-2012-02-20 (Intellectual Property Rights)
- NEP-LAW-2012-02-20 (Law & Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shapiro, Carl, 2003.
" Antitrust Limits to Patent Settlements,"
RAND Journal of Economics,
The RAND Corporation, vol. 34(2), pages 391-411, Summer.
- Shapiro, Carl, 2001. "Antitrust Limits to Patent Settlements," Competition Policy Center, Working Paper Series qt87s5j911, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
- Carl Shapiro, 2003. "Antitrust Limits to Patent Settlements," Law and Economics 0303004, EconWPA.
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