Patents

The enforcement of intellectual property rights (IPR) in less developed countries is currently a topic of much public debate. Whether it is protecting the copyrights of Western recording artists or preventing `copycat’ technology goods, OECD countries are attempting to compel less developed countries (LDCs) to enforce IPR in their country. No area of IPR enforcement is more controversial, however, than patent protection for pharmaceutical drugs. In the 1995 Uruguay round of the World Trade Organization talks (WTO) the Trade Related Intellectual Property Rights (TRIPS) agreement was reached. TRIPS specifies that all WTO members must enforce product patents in all fields. While on paper this has occurred, in many countries pharmaceutical patent protection is either not enforced or—as in India—it is explicitly excluded from the TRIPS agreement.

In their 2003 NBER working paper, Chaudhuri, Goldberg and Jia (CGJ) attempt to measure the welfare effects of pharmaceutical patent enforcement in India for the anti-bacterial category fluoroquinolones. The main value of the paper is that the welfare effects are calculated using estimated parameters from retail pharmaceutical audits performed by an Indian market research firm. In most prior studies on LDCs, welfare effects were estimated either in a purely theoretical framework with assumed parameters or employing estimated elasticities from studies on developing countries. While this study provides an interesting case study that can help researchers understand the health care market in LDCs, the authors examination of the welfare effects of IPR occurs in a static setting. Patents are inherently inefficient in the short-run, and Chaudhuri, Goldberg, and Jia’s findings of significant welfare losses are hardly surprising since dynamic innovation effects are not taken into account. Despite these flaws, the paper does give future researchers a base upon which to build dynamic models in the future.

The main finding of the CGJ paper is the patent protection in the fluoroquinolone product market reduces welfare dramatically. The authors claim that if patent production was introduced into India, consumer surplus would drop by 32 billion rupees ($713m USD), domestic profits would drop by 2.3 billion rupees ($50m USD) and foreign producers would only gain about 2.6 billion rupees ($57m USD). While, this claim is eminently believable, the result is far from surprising. In all settings, patents create rents for the firms which hold them; thus it is always welfare improving to eliminate patents in the short run. What the paper mostly ignores is the dynamic effects in which patents act as an incentive for innovation.

Ignoring dynamic effects is acceptable using only very restrictive conditions. India may represent such a small market that western firms would have no incentive to perform R&D for cures for India specific diseases regardless of if patent protection is enforced or not. Further, India may be so poor that no one would purchase the drug at patent-protected world prices. If the only profitable price to sell drugs in India is below the world price, Indian nationals would have an arbitrage opportunity on the world market and worldwide profits of the patent-holding firm would be eroded. Finally, without patent protection, firms may avoid selling in India for fear of local firms creating generic drugs.

Each of these conditions is most likely not satisfied in India. While India does have a low GDP per capita (currently 154th in the world), it is still the fourth largest economy due to its sizable population. Firms may be wary of selling at below world prices since their goal is to maximize worldwide profits and not simply to optimize profits within the Indian market. In this case, the equilibrium simply states that multinationals should charge the world price. Development of generic drugs is a valid worry for western firms, but with the advent of the internet and global professional networks, Indian firms are able to create generic drugs whether or not a Western drug firm sells in India. In fact, the CGJ paper states that India is the leading producer of generic drugs in terms of volume. For all of these reasons, the CGJ paper’s lack of attention to the R&D incentives patents provide creates great doubts as to the validity of any long-run welfare estimation.

CJG find evidence that a domestic product is often a better substitute for another domestically produced product using a different molecule than it is for a foreign-produced produce using the same molecule. CJG claim that distribution networks may explain this finding, but a more realistic conclusion is that doctors who recommend domestically produced ciprofloxacin may also recommend domestically produced norfloxacin. One difficulty in modeling health care demand is that patients do not have perfect information and purchasing decisions are heavily influenced by doctor recommendations. Further research could explore why domestic drugs using different molecules are good substitutes taking into account informational asymmetries.

The major finding of this paper is that patents create significant welfare losses, most of which occurs on the consumer side from decreased product variety. This is not a novel finding since patents by definition create distortionary monopoly rents for its holders at the cost of consumer surplus. The key research question to answer in this field is to estimate the elasticity of R&D for multinational and local firms with respect to LDC patent protection. Since the Indian government knows the disease burden of its country, offering prize money for the discovery of a vaccine or treatment for a specific disease would likely be Pareto improving compared to patent enforcement. The Rockefeller Foundation has pursued this tract and has posted an award for a diagnostic test for chlamydia and gonorrhea. It still remains an open question whether or not pharmaceutical patents improve welfare, and future studies analyzing the health care market should examine whether patents, prizes, research contracts or no IPR enforcement whatsoever is the best way to improve welfare in LDCs.

• Shubham Chaudhuri, Pinelopi K. Goldberg, and Panle Jia (2003) “The Effects of Extending Intellectual Property Rights Protection to Developing Countries: A Case Study of the Indian Pharmaceutical Market” NBER WP #10159.