Introduction
The Access to Medicine Foundation describes its mission as stimulating pharmaceutical and vaccine companies to do more for people in low and middle income countries who do not have access to medicine. In essence, movement for increasing access to medicines seeks to ensure that the drugs manufactured by these companies reach people who would not be able to afford them normally.
There are several ways in which access to medicines can be increased. Most solutions lie within the realm of intellectual property law – solutions such as creating public interest exceptions to patent rights.
However, the issue of access to medicine has also brought to the fore an interesting interface between competition and patent laws. In an earlier post on this blog, Pavishka Mittal discussed certain anti-competitive practices that large pharmaceutical companies engage in due to the patent rights that are granted to them.
In this post, we take a step back to understand this interface and discuss the economic undercurrents that inform a policy decision in this area.
How do competition and patent interact?
In the context of access to medicine, competition and patent law are best understood as instruments of policy that can be used to achieve what is best for the consumer. Theoretically, competition and patent law are both capable of streamlining economic efficiency toincrease consumer welfare. Patent law incentivises research and innovation by granting the creator with the right to reap the economic benefits of their work to the exclusion of others. Competition law, in turn, operates as a check to anti-competitive practices that creators may adopt as a consequence of the exclusive right to sell granted by patent law.
Generally, the policy decisions in this realm, lie in determining the strength of the right granted, and the activities that should fall within the scope of anti-competitive practices. To inform these policy decisions, however, we must explore the economics that underlies this interaction.
The primary concern of competition law is to drive prices of products as close to their marginal cost as possible by encouraging competition between producers (technically referred to as ‘static efficiency’). The idea is that new producers will continue to enter the market until the price at which the product is sold reaches the marginal cost of its production. Static efficiency, therefore, refers to a short-term goal of ensuring that consumers benefit from the lowest possible prices.
Patent law, however, operates to facilitate the production of products that are not already available in the market by encouraging innovation amongst producers. The idea here is that producers will spend on research and development if they are offered incentives that make it economically wise to do so. Patent law, therefore, operates to create new markets for products that did not exist in the market (technically referred to as ‘dynamic efficiency’). Dynamic efficiency, therefore, benefits consumers by offering them the luxuries of choice and better products.
It has been argued that competition law also encourages dynamic efficiency, by offering producers advantages such as ‘first mover’ benefits that attracts and retains consumers. This is, however, a secondary or ancillary effect of competition policy at best.
The concepts of static and dynamic efficiency explainwhat is at stakein competition and patent policies. The dynamic efficiency that patent rights promote come at the cost of static efficiency that competition law promotes. This is because the patent right granted leads to the creation of a new market, in which they are the sole producer, thereby avoiding the price competition that static efficiency requires.
In a utopian environment, where competition and patent policy are perfectly balanced, patent rights would be granted only for those innovations which would not be created without this incentive. Consumer welfare reaches the zenith in this environment, as static efficiency is only impaired to the extent that is necessary to maintain dynamic efficiency. For the consumer, this translates into products that are cheap and technologically superior.
This utopian environment falls in the centre of the competition-patent policy spectrum, of which one extreme represents a competition dominant regime, and the other a patent dominant regime. In the competition dominant regime, patent rights are subject anti-competitive prohibitions, such as a those from excessive pricing, contractually restricting competitors, or refusing to deal, that weigh heavier or equally with prohibitions in other industries. In contrast, a patent dominant regime would immunise producers completely from any of these prohibitions.
Conclusion
The decision of where to fall on the competition-patent spectrum for medicine depends on a large number of factors, all of which we cannot account for here. Solely with respect to the economics, however, a competition dominant regime should be favoured where the harms of market exploitation (to consumers) outweigh the benefits of increased incentives to innovate, and a patent dominant regime where the opposite is true.
This post has been authored by Rishabh Mohnot, 3rd year student and Nihal Tandon, 1st year student at the West Bengal National University of Juridical Sciences.
Comments