An Economic Justification for Open Access to Essential Medicine Patents in Developing Countries

Abstract

This paper offers an economic rationale for compulsory licensing of needed medicines in developing countries. The patent system is based on a trade-off between the "deadweight losses" caused by market power and the incentive to innovate created by increased profits from monopoly pricing during the period of the patent. However, markets for essential medicines under patent in developing countries with high income inequality are characterized by highly convex demand curves, producing large deadweight losses relative to potential profits when monopoly firms exercise profit-maximizing pricing strategies. As a result, these markets are systematically ill-suited to exclusive marketing rights, a problem which can be corrected through compulsory licensing. Open licenses that permit any qualified firm to supply the market on the same terms, such as may be available under licenses of right or essential facility legal standards, can be used to mitigate the negative effects of government-granted patents, thereby increasing overall social welfare.

Pharmaceutical Pricing in Emerging Markets: Effects of Income, Competition and Procurement

“…The World Trade Organization's requirement that all countries adopt a 20-year product patent regime as a condition of World Trade Organization membership has prompted concerns that patents undermine generic availability and make drugs unaffordable in MLICs. In theory, patents need not imply high prices if originator firms price discriminate across countries based on per capita income (PCI) (Malueg and Schwartz, 1994;Danzon and Towse, 2003); however, incentives for pricing commensurate with mean income may be undermined by price spillovers across countries (due to parallel trade and external referencing) and by skewness of income distributions (Flynn et al, 2009). In practice, although generic copies are available for most originator drugs, asymmetric information about generic quality potentially undermines price competition.…”

“…Third, Flynn et al (2009) show that the highly skewed income distribution in many MLICs would lead a single price monopolist to charge higher prices in poor countries than would be predicted based solely on PCI. No empirical evidence is presented.…”

“…The Gini measure of income equality is expected to be positively related to prices if income inequality leads to higher prices due to demand convexity (Flynn et al, 2009). This effect is expected to occur only for originators, if generics are price competitive, and only in the retail sector.…”

Ethical and Economic Perspectives on Global Health Interventions

“…8 Parallel-import and reference-pricing problems notwithstanding, pharmaceutical firms often find it profitable to sell their patented products in poorer countries at lower prices. But intra-national inequalities tend to be so large that in most less-developed countries an important medicine's domestically profitmaximizing sales price will place it out of reach of the majority of the country's population (Flynn, Hollis and Palmedo 2009).…”

Ethical and Economic Perspectives on Global Health Interventions

“…10 Parallel-import and reference-pricing problems notwithstanding, pharmaceutical firms often find it profitable to sell their patented products in poorer countries at lower prices. But even intra-national inequalities are nowadays so large that in most less-developed countries an important medicine's domestically profit-maximizing sales price will place it out of reach of the majority of the country's population (Flynn, Hollis and Palmedo 2009). 5). Patents fit poorly with libertarian views which celebrate property rights and freedom since they restrict the freedom to use one's physical property in novel ways.…”