Strong patent laws block new innovations and prevents new innovators from entering the market.

3.3 Patents, innovation and market competition The central policy question of our work is how the patent system affects innovation and competition in the pharmaceutical industry. We tackle this issue by running a set of policy experiments variating over our baseline scenario. We shock at 푡 = 100 the two main parameters that regulate the appropriability conditions guaranteed by the patent system: Patbr and Patlen. The former affects the extent of patent protection in each submarket’s product space, while the latter influences its duration. Figure 8 shows the effects of changing the breadth of the patent system on different industry outcomes using boxplots of Monte Carlo distributions. To further investigate statistical significance, Monte Carlo averages and the associated standard errors are also reported in Table B.1. First, increasing the extent of patents reduces exploitable technological opportunities and has a negative impact on innovation within submarkets (innovation type A) and on firm diversification (innovation type B), as measured by the share of blocked products out of the total of products introduced. Intuitively, the broader is the area protected, the higher will be the probability to incur in IPR violations and have your product blocked by the patent system. In a similar fashion, increasing breadth also grants stronger protection to incumbents (especially to market leaders) and entails less innovation from entrants (i.e. a higher share of blocked products for entrants). Interestingly, we find that the reduction in technological opportunities associated to a larger extent of patents also (mildly) hampers the discovery of new submarkets (innovation type C), thus, posing obstacles to the emergence of new drugs for therapeutic needs that are yet unsatisfied. As in our setting total R&D efforts are correlated with sales, they also decrease following the decline in industry size (as compared with the baseline scenario). Overall, the fall in innovation rates translates into less product variety and lower average product quality. Second-order effects of rising patent breadth are higher industry concentration, as well as markups and prices, ultimately driving adverse distributional effects for society.25