Intellectual Property and Marketing
47 Pages Posted: 4 Feb 2008
Date Written: December 2007
Patents impose static costs by restricting price-competition, but may provide static benefits by promoting non-price competition. Competitive firms engage in inefficient levels of non-price competition, when this has external effects on competitors. For example, patent monopolies may market more efficiently than competitors. On balance, therefore, patent expiration may have smaller or even negative effects on static welfare. Empirically, we find pharmaceutical patent expirations lower output by 5 percent in the short-run, due to post-expiration reduction in marketing. In the long-run, expirations still raise output. However, the value of monopoly marketing to consumers - excluding value to firms - approximately covers its cost.
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