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The Dual Effects of Intellectual Property Regulations: Within- and Between- Patent Competition in the US Pharmaceuticals Industry

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  • Frank R. Lichtenberg
  • Tomas J. Philipson

Abstract

A patent only protects an innovator from others producing the same product, but it does not protect him from others producing better products under new patents. Therefore, one may divide up the source of competition facing an innovator into within-patent competition, which results from production of the same product, and betweenpatent competition, which results from production of products on other patents. Previous theoretical and empirical micro -based analyses have emphasized the effects of intellectual property regulations on within -patent competition by showing how protecting innovative returns from imitators raises R&D incentives. However, between-patent competition affects innovative returns, particularly through creative destruction in the many high-tech industries that seem central to overall economic progress. This suggests that a fuller understanding of IP-regulations take into account its effects on between-patent competition. We find that the total effects of intellectual property regulations depend heavily on whether these unexplored effects are present. We attempt to estimate the relative magnitudes of the two sources of competition in limiting innovative returns in the U.S. pharmaceuticals market. In this market within -patent competition from so-called generic producers has been analyzed relatively more compared to competition between-patents through so called therapeutic competition. We estimate that between-patent competition, most of which occurs while a drug is under patent, costs the innovator at least as much as within-patent competition, which cannot occur until a drug is off patent. The reduction in the present discounted value of the innovator's return from between-patent competition appears to be at least as large as the reduction from competition within -patents, and may be much larger.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9303.

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Date of creation: Nov 2002
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Handle: RePEc:nbr:nberwo:9303

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  1. Richard Gilbert & Carl Shapiro, 1990. "Optimal Patent Length and Breadth," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 106-112, Spring.
  2. Suzanne Scotchmer, 1996. "Protecting Early Innovators: Should Second-Generation Products Be Patentable?," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 322-331, Summer.
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Cited by:
  1. John Cawley & John A. Rizzo, 2005. "The Competitive Effects of Drug Withdrawals," NBER Working Papers 11223, National Bureau of Economic Research, Inc.
  2. Hostenkamp, Gisela, 2013. "Do follow-on therapeutic substitutes induce price competition between hospital medicines? Evidence from the Danish hospital sector," Health Policy, Elsevier, vol. 111(1), pages 68-77.
  3. Joseph A. DiMasi & Cherie Paquette, 2005. "The Economics of Follow-On Drug Research and Development: Trends in Entry Rates and the Timing of Development - The Authors' Reply," PharmacoEconomics, Springer Healthcare | Adis, vol. 23(12), pages 1193-1202.
  4. Laura Magazzini & Fabio Pammolli & Massimo Riccaboni, 2009. "Nuove politiche per l'innovazione nel settore delle scienze della vita," Working Papers 03-2009, Competitività Regole Mecati (CERM).
  5. Francesco Laforgia & Fabio Montobbio & Luigi Orsenigo, 2007. "IPRs, technological and industrial development and growth: the case of the pharmaceutical industry," KITeS Working Papers 206, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Oct 2007.
  6. Frank R. Lichtenberg, 2002. "The Effect of Changes in Drug Utilization on Labor Supply and Per Capita Output," NBER Working Papers 9139, National Bureau of Economic Research, Inc.
  7. Alexander Heuer & Malwina Mejer & Jennifer Neuhaus, 2007. "The National Regulation of Pharmaceutical Markets and the Timing of New Drug Launches in Europe," Kiel Advanced Studies Working Papers 437, Kiel Institute for the World Economy.
  8. Arcidiacono, Peter & Ellickson, Paul B. & Landry, Peter & Ridley, David B., 2013. "Pharmaceutical followers," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 538-553.
  9. Michael Yuan, 2006. "A better copyright system? comparing welfare of indefinitely renewable copyright versus fixed-length copyright," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 15(6), pages 519-542.

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