“Bless or Curse? On Pharmaceutical Pay-for-Delay Patent Settlements”

Yucheng Ding, Wuhan University

Patent settlement in innovative industries often causes controversies due to a tradeoff between stifled competition in the short run and enhanced innovation in the long run. This paper examines how ``pay-for-delay" settlement (P4D), a prominent example in the pharmaceutical industry, affects consumer and social welfare in a unified model that incorporates both ex-post competition and ex-ante innovation. We reconciles the controversy by showing that, under certain circumstances, P4D could promote both competition and innovation once we endogenize the entry decision of the generic firms. P4D improves welfare by (1) inducing more generic challenges through alleviating uncertainty and (2) raising the branded firm's ex-ante quality investment through devaluing low-quality patents. The results also suggest that the effects depend on factors including entry costs and innovation costs, providing a new insight into the optimal rulings of the legality of patent settlement.