The Dual Effects of Intellectual Property Regulations: Within- and Between-Patent Competition in the U.S. Pharmaceuticals Industry

Abstract

A patent protects an innovator only from others who produce the same product, but it does not protect him from others who produce better products under new patents. Previous work has emphasized that intellectual property regulations stimulate research and development by protecting innovative returns from imitators of the same product, but the effects of these regulations on between-patent competition by new patents has been ignored. We attempt to estimate the relative effect of between-patent and within-patent competition on innovative returns of research-based pharmaceutical companies. We estimate that between-patent competition, most of which occurs while a drug is under patent, costs the innovator at least as much as within-patent competition, which cannot occur until a drug is off patent. The reduction in the present discounted value of the innovator’s return from between-patent competition appears to be at least as large as the reduction from competition within patents and may be much larger.