Yucheng Ding, Xin Zhao

Publication:

International Journal of Industrial Organization

Abstract:

"Pay-for-delay" settlement (P4D), in which the brand patentee reversely pays the generic infringer to delay market entry, is typically criticized for blocking competition but is often excused for its potential to maintain innovation. We present a game-theoretic model to show that when the generic firm’s entry decision is endogenized, P4D can actually increase ex post competition under certain conditions. We further explore the impact of P4D on ex ante innovation and find that the brand’s innovation incentive may increase or decrease, depending on the generic firm’s entry cost and other factors. Our findings contribute to the ongoing P4D debate by identifying conditions under which (1) P4D can improve consumer surplus and (2) the trade-off between competition and innovation can be reconciled.

[Keywords] Pay-for-delaysettlement; Generic entry; Pharmaceuticalcompetition; Innovation

Link：https://doi.org/10.1016/j.ijindorg.2019.102532