Pay-for-delay patent settlement, generic entry and welfare

Yucheng Ding and Xin Zhao

International Journal of Industrial Organization, 2019, vol. 67, issue C

Abstract: “Pay-for-delay” settlement (P4D), in which the brand patentee reversely pays the generic infringer to delay market entry, is typically criticized for blocking competition but is often excused for its potential to maintain innovation. We present a game-theoretic model to show that when the generic firm’s entry decision is endogenized, P4D can actually increase ex post competition under certain conditions. We further explore the impact of P4D on ex ante innovation and find that the brand’s innovation incentive may increase or decrease, depending on the generic firm’s entry cost and other factors. Our findings contribute to the ongoing P4D debate by identifying conditions under which (1) P4D can improve consumer surplus and (2) the trade-off between competition and innovation can be reconciled.

Keywords: Pay-for-delay settlement; Generic entry; Pharmaceutical competition; Innovation (search for similar items in EconPapers)
JEL-codes: I11 I18 K21 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:67:y:2019:i:c:s0167718719300542

DOI: 10.1016/j.ijindorg.2019.102532

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