Article accepted for publication at European Journal of Operational Research
The article "Compulsory licenses in the pharmaceutical industry: Pricing and R&D strategies," co-authored by Archita Sarmah, Domenico De Giovanni, and Pietro De Giovanni has been accepted for publication in the European Journal of Operational Research.
Highlights
- A compulsory license is economically convenient for generic producers.
- When royalty values are low, a compulsory license negatively impacts the patent holders’ profits.
- A compulsory license is always socially beneficial.
- Consumers’ price sensitivity determines the convenience of a compulsory license.
- Stochastic compulsory license mechanisms yield better economic and social benefits.
Abstract
A pharma manufacturer enters a developing country with a new drug after investing some R&D in the first period. The firm can be subjected to a compulsory license mechanism that allows a generic manufacturer to produce an imitated version of the patented product in exchange of a fixed royalty. When the patent expires, a traditional price competition ensues between the patent-holder and the generic manufacturer. We compare two deterministic scenarios wherein the patent-holder has full information regarding the compulsory license. We identify the conditions under which the license is socially and economically beneficial. Our analyses suggest that the patent-holder is seldom economically better-off. We next model a stochastic compulsory license decision rule whereby the patent-holder is exposed to a certain probability that the compulsory license is issued. We show that uncertainty renders the patent-holder more willing to operate in that market.
Article link: external page https://doi.org/10.1016/j.ejor.2019.10.021