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Does Intellectual Property Restrict Output? An Analysis of Pharmaceutical Markets

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  • Darius Lakdawalla
  • Tomas Philipson

Abstract

Standard analysis of intellectual property focuses on the balance between incentives for research and the welfare costs of restraining output through monopoly pricing. We present evidence from the pharmaceutical industry that output often fails to rise after patent expirations. Patents restrict output by allowing monopoly pricing but may also boost output and welfare by improving incentives for marketing, a form of nonprice competition. We analyze how nonprice factors such as marketing mitigate and even offset the costs of monopoly associated with intellectual property. Empirical analysis of pharmaceutical patents suggests that, in the short run, patent expirations reduce output and consumer welfare by decreasing marketing. In the long run, patent expirations benefit consumers, but by 30 percent less than would be implied by the reduction in price alone. Focusing only on the pricing issues of intellectual property may lead to incomplete or even inaccurate conclusions for welfare.

Suggested Citation

  • Darius Lakdawalla & Tomas Philipson, 2012. "Does Intellectual Property Restrict Output? An Analysis of Pharmaceutical Markets," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 151-187.
  • Handle: RePEc:ucp:jlawec:doi:10.1086/663345
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    References listed on IDEAS

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    1. repec:eee:jhecon:v:53:y:2017:i:c:p:17-37 is not listed on IDEAS
    2. Ben van Hout & Jolian McHardy & Aki Tsuchiya, 2015. "Patent Purchase as a Policy for Pharmaceuticals," Working Papers 2015007, The University of Sheffield, Department of Economics.

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