Intellectual Property and Marketing
Patent protection spurs innovation by raising the rewards for research, but it usually results in less desirable allocations after the innovation has been discovered. In effect, patents reward inventors with inefficient monopoly power. However, previous analysis of intellectual property has focused only on the costs patents impose by restricting price-competition. We analyze the potentially important but overlooked role played by competition on dimensions other than price. Compared to a patent monopoly, competitive firms may engage in inefficient levels of non-price competition -- such as marketing -- when these activities confer benefits on competitors. Patent monopolies may thus price less efficiently, but market more efficiently than competitive firms. We measure the empirical importance of this issue, using patent-expiration data for the US pharmaceutical industry from 1990 to 2003. Contrary to what is predicted by price competition alone, we find that patent expirations actually have a negative effect on output for the first year after expiration. This results from the reduction in marketing effort, which offsets the reduction in price. The short-run decline in output costs consumers at least $400,000 per month, for each drug. In the long-run, however, expirations do raise output, but the value of expiration to consumers is about 15% lower than would be predicted by a model that considers price-competition alone, without marketing effort. The non-standard effects introduced by non-price competition alter the analysis of patents' welfare effects.
|Date of creation:||Oct 2006|
|Note:||AG HC HE|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
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.:
- Gary S. Becker & Kevin M. Murphy, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 941-964.
- Bhattacharya, Jayanta & Vogt, William B, 2003. "A Simple Model of Pharmaceutical Price Dynamics," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 599-626, October.
- Carl Shapiro, 1982. "Consumer Information, Product Quality, and Seller Reputation," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 20-35, Spring.
- Paul Klemperer, 1990.
"How Broad Should the Scope of Patent Protection Be?,"
RAND Journal of Economics,
The RAND Corporation, vol. 21(1), pages 113-130, Spring.
- Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers 392, C.E.P.R. Discussion Papers.
- Nancy T. Gallini, 1992. "Patent Policy and Costly Imitation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 52-63, Spring.
- Glenn C. Loury, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 395-410.
- Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Wright, Brian Davern, 1983. "The Economics of Invention Incentives: Patents, Prizes, and Research Contracts," American Economic Review, American Economic Association, vol. 73(4), pages 691-707, September.
- Horstmann, Ignatius & MacDonald, Glenn M & Slivinski, Alan, 1985. "Patents as Information Transfer Mechanisms: To Patent or (Maybe) Not to Patent," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 837-858, October.
- Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-585, May.
- Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, Elsevier. Full references (including those not matched with items on IDEAS)