Law and Economics of Patent Settlements in the Pharmaceutical Industry

The tradeoff between competition and innovation is a much-discussed problem in economic policy. The central question is how efficient markets can be ensured by setting an institutional framework which guarantees efficient prices and innovation from a consumer welfare perspective. Competition policy, in particular, has the task to set a framework for agreements between firms regarding these goals. The subject matter of this dissertation is to study agreements between firms which relate to patents and at the same time raise competition concerns regarding consumer welfare. For this reason, these agreements are an essential part of the tradeoff between competition and innovation. Generally, consumer welfare is influenced by existing products and their prices and quantities on one hand, and by the emergence of new products and services on the other hand. These two sides are not independent from each other. From an economic policy perspective, it is well understood that market power results in negative price effects for consumers. At the same time market power and resulting profits ensure an essential incentive mechanism to enable innovation. Since the innovation process goes along with costs, for instance for research and development, firms face the critical problem of the approbiability of resulting rents from innovation processes. In case this approbiability of the innovator is not sufficiently ensured, for instance through imitation of innovation by competitors, the market failure problem exists that there are not sufficient investments in innovation. A patent is an economic policy solution for this market failure problem and grants to the innovator a monopoly right which is temporally, locally and objectively limited for the marketing of an invention. In this regard the patent itself is an inherent tradeoff, because it must find a balance between innovation incentives on one hand and the problem of negative price effects because of the granted monopoly position on the other hand. The economic literature has extensively discussed the question of the optimal design of patent rights, for example their optimal length and breadth