Patents, Essential Medicines, and the Innovation Game

Current international patent rules strike an uneasy balance between conflicting views about patents. The precarious nature of this balancing act is illustrated by the recent heated debate about the conditions under which compulsory licenses will be available for certain essential medicines under the Trade Related Aspects of Intellectual Property (TRIPS) agreement. That debate produced a compromise that will do little to fix the essential medicines problem. This paper argues that the recent debate was misplaced because it ignored differing elasticities of demand between developed and developing country markets. Demand elasticity is a primary driver of the utility of patent rules. If demand is inelastic, strong patent protection allows the patent owner to charge a price premium and the social cost of the patent monopoly is minimized. If demand is elastic, however, the justification for strong patent protection evaporates. In a demand elastic market, the patent owner cannot sustain supercompetitive pricing, and the social cost of such pricing is high. This paper argues that the level of patent protection in developing countries is irrelevant when there is inelastic demand and a relatively large market in developed countries. The author supports this argument with a game theory analysis of the essential medicines debate. The author's analysis shows that, at least with respect to essential medicines for which there is strong demand in developed countries, the level of patent protection in developing countries makes no difference. The author concludes that the international patent system governing such products should allow greater flexibility for generic imitator competition in developing country markets