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Pay‐for‐delay with settlement externalities

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  • Emil Palikot
  • Matias Pietola

Abstract

Pay‐for‐delay patent settlements, in which the incumbent patentee pays a potential entrant to withdraw a patent challenge and stay out of the market, cost patients and taxpayers billions of dollars in higher pharmaceutical prices. We show that in markets with one incumbent and several entrants, the possibility of conditioning such settlements on litigation outcomes against other entrants results in the exclusion of all entrants from the market. When conditional contracts are infeasible, the incumbent licenses the patent or fights entry in court: the resulting competition benefiting consumers. Prohibiting all pay‐for‐delay settlements increases litigation and may harm consumers by reducing licensing.

Suggested Citation

  • Emil Palikot & Matias Pietola, 2023. "Pay‐for‐delay with settlement externalities," RAND Journal of Economics, RAND Corporation, vol. 54(3), pages 387-415, September.
  • Handle: RePEc:bla:randje:v:54:y:2023:i:3:p:387-415
    DOI: 10.1111/1756-2171.12445
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    References listed on IDEAS

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