Friday, May 17, 2019
Jorge Lemus, University Of Illinois Urbana Champaign and Emil Temnyalov, University of Technology Sydney, Economics Department address Pay-for-delay with Follow-on Products.
ABSTRACT: We study pay-for-delay agreements when the patent holder has the option to introduce follow-on products. We derive novel implications for antitrust regulation, litigation, and welfare. We show that ignoring follow-on products biases the inference about patent strength made from observing pay-for-delay agreements, which antitrust authorities use to determine whether the agreement is anti-competitive (the “Actavis inference”). With follow-on products, settlements in which reverse payments are allowed involve a lower transfer from the brand firm to the generic, compared to the setting without follow-on products. If reverse payments are forbidden, and firms can bargain over the generic’s entry date, follow-on products tend to push the parties to settle on an earlier date of entry than they otherwise would agree on without follow-on products. We show that under pure-delay settlements, litigation may arise in equilibrium, providing a novel explanation of equilibrium litigation.