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Optimal Incentives for Patent Challenges in the Pharmaceutical Industry

Author

Listed:
  • Enrico Böhme

    () (University of Marburg)

  • Jonas Severin Frank

    () (University of Marburg)

  • Wolfgang Kerber

    () (University of Marburg)

Abstract

Since the patent system relies on private litigation for challenging weak patents, and patent settlements might influence the incentives for challenging patents, the question arises whether the antitrust assessment of patent settlements should also consider their impact on the incentives to challenge potentially invalid patents. Patent settlements in the pharmaceutical industry between originator and generic firms have been scrutinized critically by competition authorities for delaying the market entry of generics and therefore harming consumers. In this paper we present a model that analyzes the tradeoff between limiting the delay of generic entry through patent settlements and giving generic firms more incentives for challenging weak patents of the originator firms. We show that allowing patent settlements with a later market entry of generics than the expected market entry under patent litigation can increase consumer welfare under certain conditions. We introduce a policy parameter for determining the optimal additional period for collusion that would maximize consumer welfare and show that the size of this policy parameter depends on the size of the challenging costs, the intensity of competition, and the duration between the generics’ market entry decisions.

Suggested Citation

  • Enrico Böhme & Jonas Severin Frank & Wolfgang Kerber, 2017. "Optimal Incentives for Patent Challenges in the Pharmaceutical Industry," MAGKS Papers on Economics 201702, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201702
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    File URL: https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2017/02-2017_boehme.pdf
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    References listed on IDEAS

    as
    1. Mark A. Lemley & Carl Shapiro, 2005. "Probabilistic Patents," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 75-98, Spring.
    2. Shapiro, Carl, 2003. " Antitrust Limits to Patent Settlements," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 391-411, Summer.
    3. 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.
    4. Henry G. Grabowski & Margaret Kyle, 2007. "Generic competition and market exclusivity periods in pharmaceuticals," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 491-502.
    5. David Encaoua & Yassine Lefouili, 2009. "Licensing weak patents," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00415747, HAL.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    patent settlements; collusion; patent challenges;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - 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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