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Economic Analysis of Pay-for-delay Settlements and Their Legal Ruling


  • Gratz, Linda


In 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.

Suggested Citation

  • Gratz, Linda, 2012. "Economic Analysis of Pay-for-delay Settlements and Their Legal Ruling," Discussion Papers in Economics 12734, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenec:12734

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    References listed on IDEAS

    1. Shapiro, Carl, 2003. " Antitrust Limits to Patent Settlements," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 391-411, Summer.
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    Cited by:

    1. Böhme, Enrico & Frank, Severin & Kerber, Wolfgang, 2016. "Optimal Incentives for Patent Challenges in the Pharmaceutical Industry," Annual Conference 2016 (Augsburg): Demographic Change 145637, Verein für Socialpolitik / German Economic Association.
    2. Severin Frank & Wolfgang Kerber, 2016. "Patent Settlements in the Pharmaceutical Industry: What Can We Learn From Economic Analysis?," MAGKS Papers on Economics 201601, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

    More about this item


    antitrust and intellectual property law; patent settlements; collusion; per se rule; rule of reason; Hatch-Waxman Act;

    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, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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