Optimal Incentives for Patent Challenges in the Pharmaceutical Industry

MAGKS Joint Discussion Paper Series in Economics, 02-2017

36 Pages Posted: 24 Feb 2017 Last revised: 22 Sep 2018

See all articles by Enrico Boehme

Enrico Boehme

University of Marburg; Chair of Public Finance

Jonas Frank

University of Marburg, School of Business & Economics

Wolfgang Kerber

University of Marburg - School of Business & Economics

Date Written: January 2, 2017

Abstract

Since the patent system relies on private litigation for challenging weak patents, and patent settlements might influence the incentives for challenging patents, the question arises whether the antitrust assessment of patent settlements should also consider their impact on the incentives to challenge potentially invalid patents. Patent settlements in the pharmaceutical industry between originator and generic firms have been scrutinized critically by competition authorities for delaying the market entry of generics and therefore harming consumers. In this paper we present a model that analyzes the tradeoff between limiting the delay of generic entry through patent settlements and giving generic firms more incentives for challenging weak patents of the originator firms. We show that allowing patent settlements with a later market entry of generics than the expected market entry under patent litigation can increase consumer welfare under certain conditions. We introduce a policy parameter for determining the optimal additional period for collusion that would maximize consumer welfare and show that the size of this policy parameter depends on the size of the challenging costs, the intensity of competition, and the duration between the generics’ market entry decisions.

Keywords: patent settlements, collusion, patent challenges

JEL Classification: L10, L40, O34

Suggested Citation

Boehme, Enrico and Frank, Jonas and Kerber, Wolfgang, Optimal Incentives for Patent Challenges in the Pharmaceutical Industry (January 2, 2017). MAGKS Joint Discussion Paper Series in Economics, 02-2017. Available at SSRN: https://ssrn.com/abstract=2922496 or http://dx.doi.org/10.2139/ssrn.2922496

Enrico Boehme

University of Marburg ( email )

Universitätsstrasse 24
D-35032 Marburg, D-35032
Germany

Chair of Public Finance ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

HOME PAGE: http://www.wiwi.uni-frankfurt.de/professoren/weichenrieder/

Jonas Frank

University of Marburg, School of Business & Economics ( email )

Am Plan 2
Marburg
Germany
+49 6421 2823925 (Phone)

Wolfgang Kerber (Contact Author)

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany
+49 6421 2823921 (Phone)

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