Patents are uniquely ineffective for innovation in pharmaceuticals – the monopoly structure results in too little vital innovation and too high of costs

It has long been acknowledged that patents, while incentivizing innovation, fail to lead to the first best outcome for society because they rely on the distortion-creating incentives of monopoly (Nordhaus, 1969; Wright, 1983; Shavell and van Ypersele, 2001). The monopoly structure generally results in too little innovation (dynamic loss) and in too-high pricing (static loss) relative to the social optimum. One area in which these issues may be particularly salient is global health. Many medicines, including life-saving drugs, are inexpensive to manufacture once innovated, but patents associated with their innovation can generate high prices which limit access to these technologies (Stiglitz and Jayadev, 2010; Quigley, 2015). In addition, the incentive for patent-driven investment in innovation may be too small relative to what is socially optimal, particularly when the global burden of disease falls heavily on poor populations. For example, the latter has been argued to be a major contributing factor to the low private investment in HIV/AIDS vaccine research relative to the disease’s high global health burden (Kremer and Snyder, 2006).