Essay On Economics Of Patents

Patents are being used by government to encourage innovations – they are particularly widespread in the pharmaceutical industry. Companies are being granted monopoly on their product in exchange for its public disclosure. As a result, the producer can control the supply and, without competition, charge higher prices than it would be in a competitive market. Without system of patents companies are reluctant to invent new products as those can be replicated creating first mover disadvantage due to investments in research and development.
Patents usually are not eternal – one day they expire, and then other players can join the market with similar or totally indistinguishable products. Competition decreases the prices and reduces the profits of innovator. Apart from expiration, there may be other reasons for a patent to be upheld, for instance, abuse of monopolistic power – competitor can challenge it in a court. Patents are rarely taken for granted, for there is always a chance of upholding.
The downside of settlement, however, is that it allows to secure the patent against known competitors, while there is no guarantee that other anxious players will not appear in the nearest time perfectly ready to launch similar product. In this case the company innovator may simply run out of financial capacity to protect the potent.
Consumers suffer from these deal most – the dollars that could have constituted consumer surplus are simply being transferred from one pharmaceutical company to another, with market remaining inefficient.
References:Federal Trade Commission. Pay-For-Delay: How Drug Company Pay-Offs Cost Cost Consumer Billions. < http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf> Retrieved on 10.11.2013
NY Times. Supreme Court Lets Regulators Sue Over Generic Drug Deals.
< http://www.nytimes.com/2013/06/18/business/supreme-court-says-drug-makers-can-be-sued-over-pay-for-delay-deals.html?_r=1&> Retrieved on 10.11.2013