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Compulsory licenses in the pharmaceutical industry: Pricing and R&D strategies

Archita Sarmah, Domenico De Giovanni and Pietro De Giovanni

European Journal of Operational Research, 2020, vol. 282, issue 3, 1053-1069

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.

Keywords: Game theory; Compulsory license; Pricing; R&D; Pharmaceutical industry (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.ejor.2019.10.021

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