Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Thursday, November 15, 2012

Does Intellectual Property Restrict Output? An Analysis of Pharmaceutical Markets

Posted by D. Daniel Sokol

Darius Lakdawalla (USC) and Tomas Philipson (Chicago) ask Does Intellectual Property Restrict Output? An Analysis of Pharmaceutical Markets. I have known Darius since he was 19 and I was 18. He was smart then too.

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.

http://lawprofessors.typepad.com/antitrustprof_blog/2012/11/does-intellectual-property-restrict-output-an-analysis-of-pharmaceutical-markets.html

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