How Stronger Patent Protection in India Might Affect the Behavior or Transnational Pharmaceutical Industries

study is based on a chapter of my doctoral dissertation at the University of Heidelberg, Germany. Helpful comments by Clive Bell, Tony Venables, Jayashree Watal, and seminar participants at the World Trade Organization and World Bank are gratefully acknowledged. Any remaining errors are my own responsibility. The views, interpretations and conclusions expressed here are my own and they should not be attributed to the World Bank, its Executive Board of Directors, its management or any of its member countries. How do stronger patent rights affect the behavior of patent rights of transnational corporations in developing countries? How are market structure and consumer welfare affected by extending patent protection to products that could previously be freely imitated? Will research-based transnational corporations devote more resources to the development of technologies relevant to the needs of developing countries? This paper addresses these questions in the particular context of the Indian pharmaceutical industry. It simulates the effects of introducing patent protection for pharmaceutical products—as required by the WTO Agreement on Trade Related Intellectual Property Rights (TRIPS)—on market structure and static consumer welfare. The theoretical model developed for the simulation analysis accounts for the complex demand structure for pharmaceutical goods. Consumers can choose among therapeutic substitute drugs that are available to treat a particular disease. In addition, for each drug, they have the choice among various brands that are chemically equivalent, but differentiated through the promotional activities of pharmaceutical manufacturers. This model is calibrated for two therapeutic groups in the Indian market—quinolonnes and synthetic hypotensives—using 1992 brand level data. In both of these groups, a subset of all available drugs was under patent protection in Western Europe, but due to the exclusion of patentability in India, these drugs were freely imitated by Indian manufacturers. Using the calibrated model parameters, the simulation analysis then asks the hypothetical question of how the market structure in the two groups would have looked like, if India would have granted patents for pharmaceutical products. The simulations reveal to what extent price increases, profits, and static welfare losses depend on the values of assumed elasticities. In particular, they highlight the role of therapeutic competition in determining the impact of patent protection. The availability of close therapeutic substitute drugs that are not covered by patent rights can restrain prices and limit consumer welfare losses. From the viewpoint of pharmaceutical transnational corporations, potential profits depend crucially on the overall price elasticity in the …