Intellectual Property and Marketing [report]

Darius Lakdawalla, Tomas Philipson, Y. Richard Wang
2006 unpublished
Economists have tended to focus exclusively on the costs patents impose by restricting pricecompetition. We analyze the important but overlooked role played by non-price competition. Compared to a patent monopoly, competitive firms may engage in inefficient levels of non-price competition-such as marketing-when these activities have external effects on competitors. For example, patent monopolies may price less efficiently, but market more efficiently than competitive firms. As a result, patent
more » ... s a result, patent expiration may have smaller or negative effects on consumer welfare. We measure the empirical importance of these theoretical implications, using patent-expiration data for the US pharmaceutical industry from 1990 to 2003. Accounting for their effects on both pricing and marketing, patent expirations actually lower output by about 5 percent in the short-run, due to post-expiration reduction in marketing. In the long-run, expirations do raise output, as expected. However, the value of pharmaceutical marketing to consumers alone -even excluding its value to firms -approximately covers its cost.
doi:10.3386/w12577 fatcat:nxbnuq2qhbeybhvd5gf3oqrsma