An Economic Analysis on Drug Companies and the Game they Play

How Patent Create a Kind of Monopoly and Benefits Conveyed to the Owner

Patents are exclusive rights granted to an inventor or an assignee whose primary aim is to encourage innovation by providing a limited form of monopoly to the inventor. From an economic point of view, monopoly when the market is characterized by a sole seller offering a unique product. In such a case, the seller faces no competition, thus enjoys the privilege of setting prices for goods offered (Jones 1398). Companies can, therefore, misuse the privilege hence exploiting consumers by charging extremely high prices. In the case of drug companies, such practices may make the cost of health services unbearable. Similarly, patents discourage competitors, thus may lead to inferior products being penetrated in the market.

Patents also convey numerous benefits to the owner. For instance, they give a chance to the inventors to recoup investments on the projects, thus leading to financial gains. Additionally, it would only be fair to inventors to protect their hard work and investments by awarding some exclusive rights. Empirical evidence shows that intellectual property such as patents drives a large number of companies due to the sole rights offered by patents.

What Happens when Patent Protection for Technology Runs Out

When patent protection expires, many other businesses usually take on the initiative of launching similar products. Often, they bring in innovations that enhance the primary outcomes thus improving the quality. They may also lower the prices of these products. The market may end up being flooded by imitations (Jones 1404). In most cases, consumers are not in a position to pay the same price for the goods initially provided by the monopoly. The market now changes from a monopolistic structure to other forms such as oligopoly or perfect competition.

Effects of Pay-for-Delay Actions on Producers and Consumers

Drug companies who innovated a particular product can delay competition by agreeing to pay competitors to hold their competing goods off the market for some period. These ‘pay-for-delay’ agreements arise in some patent litigation settlements between generic pharmaceutical and brand name companies (Federal Trade Commission 3). Typically, such litigations occur within the stipulations of the Hatch-Waxman Act. Under his Act, a generic competitor can push for an entry in the market before the expiration of patents issued to the brand-name drug company. Pay-for-delay actions deny consumers the chance to save billions of dollars. They miss out the benefits accruing from lower prices offered by generic competitors. To the companies, however, pay-for-delay actions are win-win situations.

Should Pay-for-Delays Tactics be Allowed?

Pay-for-delay tactics should not be allowed. In the U.S. and the world at large, the high cost of healthcare has continued to act as a barrier to the economic wellness of patients. Specifically, the price of drug prescriptions has been extremely high. Countries such as the U.S. and Canada spend a significant portion of its per capita income on pharmaceuticals (Jones 1402). Pay-for-delay arrangements stand to make this situation even worse.

Further, these arrangements stand to encourage monopolization of the drug manufacturing industry. Discouraging of generic drugs inhibits competition, thus leaving brand-name companies to set prices at their discretion. However, if such arrangements are stopped, companies will offer fair prices for drugs. Similarly, quality will also be improved as new companies provide improved products. From an economic point of view, consumers will benefit greatly. Stopping pay-for-delay tactics stands to save the U.S. health systems millions of dollars annually.

Works Cited

Federal Trade Commission. “Pay-for-delay: how drug company pay-offs cost consumers billions.” Washington, DC: Federal Trade Commission 16 (2010).

Jones, Gregory H., et al. “Strategies that delay or prevent the timely availability of affordable generic drugs in the United States.” Blood 127.11 (2016): 1398-1402.