Compulsory licensing, price controls, and access to patented foreign products

Abstract

We analyze how a price control and the threat of compulsory licensing (CL) affect consumer access in a developing country (South) to a patented foreign product. In the model, the Southern government sets the level of the price control on a Northern patent-holder who chooses between entry and voluntary licensing (VL). While entry incurs a higher fixed cost, licensed production is of lower quality. If the patent-holder does not work its patent locally, the South is free to use CL. The threat of CL: ensures that consumers have access to (a lower quality version of) the patented good when the patent-holder chooses not to work its patent locally; improves the terms at which VL occurs; can cause the patent-holder to switch from VL to entry; and can delay consumer access when CL replaces VL or entry. We also show that a price control and CL are mutually reinforcing instruments.