How do the Social Benefits and Costs of the Patent System Stack Up in Pharmaceuticals?

Abstract:     
This paper explores the workings of the patent system in the context of the generation of new pharmaceutical products. First it identifies the relevant characteristics of the patent system and its relation to the market. The paper concedes that, in general, the patent system is probably the best way of generating new technology, in substantial part because that system uses the market to provide both incentives and rewards. The paper also identifies downsides of this patent/market system: deadweight loss and the unresponsiveness of that patent/market system to the needs of the poor. The paper then explores the social costs and benefits of the patent system, drawing from analyses by Arrow and Kaplow. Drawing from a format developed by Kaplow, the paper develops a linear (and constant cost) model in which social costs and benefits are compared. Under the linear model, social costs remain low relative to social benefits for a substantial period. Then the linear model is made more complex by abandoning the earlier assumptions of constant costs and linear demand. It shows how some nonlinear demand might result in very large deadweight losses, producing results significantly different from those of the linear model. The paper then considers price discrimination as a means by which producers might both increase their profits and reduce deadweight losses. The paper then explores the possibility that pharmaceutical producers might reduce global deadweight losses through price discrimination that favored third-world nations. Because international price discrimination might be discouraged by the prospect of arbitrage, the paper considers the extent to which existing laws provide means of protection against arbitrage. The paper considers contract law, patent law, and potential arrangements under the WTO and the Doha Declaration. Finally, the paper considers the possibility that global welfare would be maximized through an international treaty providing for the public and international funding of a limited class of pharmaceutical products.

Keywords: patent, pharmaceuticals, drugs

JEL Classifications: K00, K11, K20, K29, K39, O34

Accepted Paper Series