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STRENGTHENING PROTECTION OF INTELLECTUAL PROPERTY RIGHTS: THE CASE DEPENDS ON ‘NORTHERN’ FIRMS SELLING NEW PRODUCTS IN ‘SOUTHERN’ MARKETS

  • Published Date: March 2013

The value of stronger global protection of intellectual property rights (IPR) – for example, through the Agreement on Trade Related Aspects of Intellectual Property (TRIPS) at the World Trade Organization (WTO) – depends crucially on whether firms from developed countries will respond by selling new products in developing countries.

That is the central conclusion of research by Professor Kamal Saggi, published in the March 2013 issue of the Economic Journal. He notes that emerging empirical evidence shows that TRIPS enforcement has indeed started prompting such a change in the global economy.

Professor Saggi notes that the extent to which the IPR holders can freely exercise their market power in the global economy depends on two things. First, the amount of protection available to them against potential imitators. And second, the degree to which they can charge different prices in different national markets. This study looks at the linkages between policies that determine these two facets of the market power possessed by IPR holders.

Two basic ideas motivate the analysis. The first is that due to fundamental differences in the pattern of demand across countries, firms have an incentive to charge higher prices in developed countries relative to developing ones. But they can only engage in such international price discrimination if policy restrictions in developed countries prevent parallel imports from low price markets – that is, if they practice ‘national exhaustion’ of IPR as opposed to ‘international exhaustion’ of IPR.

The second basic idea is that while holders of IPR enjoy fairly strong protection in developed countries, this is generally not the case in developing countries. In fact, until the 1995 ratification of the TRIPS agreement, IPR protection in most developing countries was weak or non-existent. The widespread imitation of foreign products and technologies by firms in developing countries was a major reason why developed countries pushed strongly for a multilateral IPR agreement at the WTO.

Given these observations, the study considers a ‘North-South’ model where Northern (developed country) policy regarding the territorial exhaustion of IPR determines whether a monopolist selling a patented good can price discriminate internationally, while Southern (developing country) policy regarding the protection of IPR determines its monopoly power within the Southern market.

By design, the model is of special relevance to the pharmaceutical industry. Not only is parallel trade in pharmaceuticals an empirically significant phenomenon, but the costs of imitating pharmaceuticals also tend to be very low relative to the costs of inventing new drugs. This makes protection against infringement of IPR crucial for patent-holders in this industry.

For example, a major reason why the local pharmaceutical industry in India came into existence is that prior to 1995, Indian patent law only recognised process patents; virtually no protection was offered to product patents. As a result, local firms were free to imitate and ‘reverse-engineer’ pharmaceuticals invented by foreign firms. As long as a local Indian firm could manufacture a patented drug via a production process that was not identical to the one used by a (foreign) patent holder, it could freely ignore the product patent and manufacture the drug in India.

In the model, imitation is attractive to the South because it lowers prices and increases variety (by providing consumers with access to a lower quality version of the patented Northern good), provided that the competition from imitation does not force the Northern firm to exit the Southern market.

The analysis provides three major insights:

· First, the Northern monopolist’s incentive to export to the South turns out to be a major determinant of the policy choices of the two regions.

· Second, the North has a stronger preference for international exhaustion if the South forbids imitation; but the South is actually more willing to do so if the North implements national exhaustion.

· Third, shutting down Southern imitation – as is required by the TRIPS agreement – increases aggregate global welfare if and only if it is necessary for inducing the Northern firm to export.

An important practical implication of this result is that the case for strengthening IPR protection in developing countries hinges critically on how such a change affects the ‘extensive margin’ of exports from developed to developing countries – that is, what matters is whether firms from developed countries will sell new products in developing countries as a result of a strengthening of IPR protection on their part.

ENDS

Notes for editors: ‘Market Power in the Global Economy: The Exhaustion and Protection of Intellectual Property’ by Kamal Saggi is published in the March 2013 issue of the Economic Journal.

Kamal Saggi is at Vanderbilt University.

For further information: contact Kamal Saggi on +1-615-322-3237 (email: k.saggi@vanderbilt.edu); or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com).