Calabresi, G. and Melamed, A. D., “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral,” Harvard Law Review 85, no. 6 (1972): 1089–1128, at 1092; see also Merges, R. P., “Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,” California Law Review 84, no. 5 (1996): 1293-1393; Reichman, J. H., “Of Green Tulips and Legal Kudzu: Repackaging Rights in Subpatentable Innovation,” Vanderbuilt Law Review 53, no. 6 (2000): 1743-1798.CrossRefGoogle Scholar

Liability rules are the default form of protection for digital broadcasting of copyrighted music in the U.S., for example, where “certain non-interactive digital audio services [may] transmit sound recordings under a compulsory license, provided that the services pay a reasonable royalty fee and comply with the terms of the license.” Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings, 37 C.F.R. §260 (2007); see 17 U.S.C. 106(6) & 114(d) (2001). Liability rules are also used to compensate American agricultural chemical companies when competitors use their test data submitted to the FDA for regulatory approval under the Federal Insecticide, Fungicide, and Rodenticide Act. See Basheer, S., “Protection of Regulatory Data Under Article 39.3 of TRIPS: A Compensatory Liability Model?” (Intellectual Property Institute, forthcoming 2008).Google Scholar

See Scherer, F. M. and Watal, J., “Post-TRIPS Options for Access to Patented Medicines in Developing Nations,” Journal of International Economic Law 5, no. 4 (2002): 913–939 [hereinafter Scherer and Watal].CrossRefGoogle Scholar

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Agreement on Trade Related Aspects of Intellectual Property Rights, April 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, art. 31, Legal Instruments-Results of the Uruguay Round vol. 31, 33 I.L.M. 81 (1994) [hereinafter TRIPS] Article 31(h) of the TRIPS agreement requires that “the right holder shall be paid adequate remuneration in the circumstances of each case [of compulsory licensing], taking into account the economic value of the authorization”. Article 31(k) adds that “[t]he need to correct anticompetitive practices may be taken into account in determining the amount of remuneration”, allowing for zero royalty licenses in appropriate cases.Google Scholar

TRIPS art. 31(h).Google Scholar

World Trade Organization, Ministerial Declaration of 14 November 2001, paragraph 3 WT/MIN(01)/DEC/2, 41 I.L.M. 755 (20 02) [hereinafter Doha Declaration] (stating: “Each Member has the right to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted”). The Doha Declaration called specific attention to the appropriateness of special measures, including compulsory licenses, to respond to “the gravity of public health problems afflicting many developing and least developed countries, especially those resulting from HIV/AIDS, tuberculosis, malaria and other epidemics.” Doha Declaration on TRIPS, paragraph 1. The Declaration recognised, and sought to address, “concerns about effects [of patents] on prices” of medicines. Doha Declaration on TRIPS, at paragraph 3. Further, the Doha Declaration records the agreement of all members that:Google Scholar

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See, e.g., WHO Commission on Macroeconomics and Health, Macroeconomics and Health: Investing in Health for Economic Development (Geneva: World Health Organization, 2001); Commission on Intellectual Property Rights, Integrating Intellectual Property Rights and Development Policy ((London: Commission on Intellectual Property Rights, 2002); Commission on Intellectual Property Rights, Innovation and Public Health, Public Health, Innovation and Intellectual Property Rights, (Geneva: World Health Organization, 2006); Lanjouw, J., Patents, Price Controls and Access to New Drugs: How Policy Affects Global Market Entry (Center for Global Development, Working Paper No. 61, 2005), available at <http://www.nber.org/papers/w11321>); Scherer, and Watal, , supra note 3; Watal, J., “Pharmaceutical Patents, Prices and Welfare Losses: Policy Options for India Under the WTO TRIPS Agreement,” World Economics 23, no. 5 (2000): 733-752.Google Scholar

Scherer, F. M., “A Note on Global Welfare in Pharmaceutical Patenting,” World Economics 27, no. 7 (2004): 1127–1142 (2004). For other economic scholarship using a similar approach, see Lanjouw, , id.; Scherer, and Watal, , supra note 3; Watal, , supra note 9.CrossRefGoogle Scholar

See Scherer, F. M. and Ross, D., Industrial Market Structure and Economic Performance, 3rd ed. (Boston: Houghton Mifflin Co., 1990): at 621–630; c.f U.S. Constitution, art. 1, § 8 (giving Congress the power “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries”).Google Scholar

See generally Outterson, K., A Request for Clarification Concerning the Proper Scope of the IGWG's Work to Improve Access to Patented Medicines, September 30, 2007, available at <http://www.who.int/phi/public_hearings/second/contributions_section1/Section1_Kevin_Outterson_Boston_Uni_Full_Contribution.pdf> (last visited February 17, 2009). (last visited February 17, 2009).' href=https://scholar.google.com/scholar?q=See+generally+Outterson,+K.,+A+Request+for+Clarification+Concerning+the+Proper+Scope+of+the+IGWG's+Work+to+Improve+Access+to+Patented+Medicines,+September+30,+2007,+available+at++(last+visited+February+17,+2009).>Google Scholar

In a perfectly competitive market, each firm is a price “taker,” and must accept the market price, which competitors drive down until it is approximately equal to the firm's marginal cost. Patented items in an imperfect, but still competitive, market will be restrained by the same market forces to a greater or lesser extent depending on the degree to which substitutes are functionally equivalent.Google Scholar

Cf. Parkin, M., Microeconomics, 7th ed. (Boston: Addison-Wesley, 2005): at 262–267 (explaining basic monopoly economics).Google Scholar

Normally, a diagram of monopoly pricing would include a marginal cost curve. The equation of marginal cost to zero approximates a simplified pharmaceutical market characterized by high fixed costs of R&D, but relatively small production costs (including the active pharmaceutical ingredients used to manufacture medicines). The marginal cost of production in the pharmaceutical industry is typically close to constant, since for most drugs inputs are available in competitive global markets. This is not true of all drugs. For example, Taxol originally used a natural ingredient derived from the yew tree and so there were biological limits to the amount that could be harvested, but for most other drugs, the costs of manufacturing are more or less constant, and therefore the incorporation of a marginal cost curve would not change the basic economic analysis.Google Scholar

The equation for inverse demand is p = 529(0.9^q).Google Scholar

See Hughes, J. W., Moore, M. J. and Snyder, E. A., ‘Napsterizing’ Pharmaceuticals: Access Innovation and Consumer Welfare, Nationall Bureau of Economic Research, Working Paper No. 9229, 2002; Duffy, J., “A Minimum Optimal Patent Term,” 2003, unpublished manuscript, available at <http://ssrn.com/abstract=354282> (last visited February 17, 2009).Google Scholar

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World Health Organization, “The Selection and Use of Essential Medicines: Report of the WHO Expert Committee,” WHO Technical Report Series 914 (2002): 16–24 (defining “Essential Medicines” as “those that satisfy the priority health care needs of the population.”) The assumption of no adequate substitutes makes our definition not necessarily the same as that of WHO.Google Scholar

See 't Hoen, E., “TRIPS, Pharmaceutical Patents, and Access to Essential Medicines: A Long Way From Seattle to Doha,” Chicago Journal of International Law 3, no. 1 (2002): 27–46, at 34 (explaining that health activists opposed proposals limiting use of compulsory licenses to drugs on the WHO Model List of Essential Drugs because only 11 of the 306 products on the list are patented).Google Scholar

Generally, the exclusive marketing right to which we refer would be granted by a patent. But other such rights, for example those created by “data exclusivity” protections that prevent generic products from being registered for sale for a period of time based on the safety and efficacy data submitted by the innovator firm, may cause similar access problems.Google Scholar

See Watal, , supra note 9.Google Scholar

WHO Regional Office of the Western Pacific, “TRIPS, Intellectual Property Rights and Access to Medicines,” HIV/AIDS Antiretroviral Newsletter, December 2002 (reporting that patients themselves pay for 50% - 95% of medicines in developing countries).Google Scholar

See Wong, E. V., Inequality and Pharmaceutical Drug Pricing: An Empirical Exercise, Center. for Economic Analysis, Economic Department, University of Colorado at Boulder, Working Paper No. 02–19, 2002. In the case that the drug is government-provided, the financial capabilities of the state and its willingness to pay for a given therapy become the relevant constraints.Google Scholar

In principle, sick individuals could borrow against expected future earnings to finance purchasing the drug today. But banks will not in general lend on that kind of basis, and so no such borrowing is possible.Google Scholar

Data from Statistics South Africa's 2000 Income and Expenditure Survey, as reported by the South African Regional Poverty Network, available at <http://www.sarpn.org.za/documents/d0001062/P1175-simkins_Nov2004.pdf> (last visited February 17, 2009). A more complete analysis would include examination of the distribution of wealth as well. But we do not know of an available estimate of the true distribution of wealth in South Africa. Typically wealth distribution is more unequal than income distribution. Poor households with a survival income typically have virtually no accumulated wealth. (last visited February 17, 2009). A more complete analysis would include examination of the distribution of wealth as well. But we do not know of an available estimate of the true distribution of wealth in South Africa. Typically wealth distribution is more unequal than income distribution. Poor households with a survival income typically have virtually no accumulated wealth.' href=https://scholar.google.com/scholar?q=Data+from+Statistics+South+Africa's+2000+Income+and+Expenditure+Survey,+as+reported+by+the+South+African+Regional+Poverty+Network,+available+at++(last+visited+February+17,+2009).+A+more+complete+analysis+would+include+examination+of+the+distribution+of+wealth+as+well.+But+we+do+not+know+of+an+available+estimate+of+the+true+distribution+of+wealth+in+South+Africa.+Typically+wealth+distribution+is+more+unequal+than+income+distribution.+Poor+households+with+a+survival+income+typically+have+virtually+no+accumulated+wealth.>Google Scholar

Our assumptions understate the steepness of the demand curve for the higher income segments since, in fact, wealthier segments of the population are likely to be willing and able to spend a greater share of their income on a needed good. AIDS is also not evenly distributed, but rather is concentrated among urban populations with somewhat higher incomes and mobility. See Piot, P., Greener, R. and Russell, S., “Squaring the Circle: AIDS, Poverty and Human Development,” PLOS Medicine 4, no. 10 (2007) (noting that AIDS is “more concentrated among the urban employed and more mobile members of society, and consequently the more wealthy groups”).CrossRefGoogle Scholar

Figure 2 is indeed exactly based on this income distribution.Google Scholar

See Income and Expenditure Survey (IES) 2000, Statistics South Africa, available at <www.statssa.gov.za> (last visited February 17, 2009) showing that the average South African household in the top 20 percent income bracket spends three to five percent of their income on out-of-pocket medical expenses, including medicines; see also Integrated Household Survey 1993, World Bank, available at <www.worldbank.org/html/prdph/lsms/country/za94/za94data.html#top> (last visited February 17, 2009). Five percent of income also appears to be a reasonable maximum for out of pocket health expenditures in the U.S. See Songer, T. J., LaPorte, R. E., Lave, J. R., Dorman, J. S. and Becker, D. J., “Health Insurance and the Financial Impact of IDDM in Families with an IDDM-affected Child” Diabetes Care 20, no. 4 (1997): 577-584.; 42 CFR § 457.560 (requiring participating states to cap poor family contributions to health at 5 percent of income).Google Scholar

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As noted above, the prevalence of HIV/AIDS is not uniform across deciles, but higher among South Africans with higher incomes. We assume uniformity in order to simplify our demonstration that a firm will maximize sales by selling exclusively to the elite. If we were to weigh demand at each income decile to account for differences in prevalence of HIV/AIDS, it would lead to an even greater difference between demand and sales at the upper and lower income deciles (firms would be less likely to sell to the middle and lower classes).Google Scholar

World Bank, World Development Indicators Database, available at <http://devdata.worldbank.org/query/> (last visited February 17, 2009) (Constant GDP in 2000 USD and population statistics for the year 2000 were taken from the data base for South Africa, Norway, and all of the countries listed in Appendix 2).+(last+visited+February+17,+2009)+(Constant+GDP+in+2000+USD+and+population+statistics+for+the+year+2000+were+taken+from+the+data+base+for+South+Africa,+Norway,+and+all+of+the+countries+listed+in+Appendix+2).>Google Scholar

Since the marginal cost of production is usually very low and nearly constant across production levels, we are showing total revenue instead of marginal revenue and marginal cost. See Parkin, , supra note 14.Google Scholar

In fact, the profit maximizing price may serve a much smaller segment of the population, as world prices of over $10,000 annually for AIDS medicines in the pre-2000 period suggests. Unfortunately, accurate data for segments of the population smaller than a decile are not readily available.Google Scholar

Norway also has an excellent health insurance system so that in principle income need not be a barrier for anyone to obtain needed drugs there. Also, we are once again assuming uniformity in HIV/AIDS prevalence across income deciles.Google Scholar

Data on income distribution in Norway for 2000 was taken from Statistics Norway, which is under the Norwegian Ministry of Finance (www.ssb.no). Statistics Norway, Norwegian Ministry of Finance, Income Distribution: More Equal Income Distribution (March 7, 2008), available at <http://www.ssb.no/english/subjects/05/01/iffor_en/> (last visited February 17, 2009). GDP data from the World Bank, supra note 32. According to UNAIDS data, there are 2500 people with HIV/AIDS in Norway, far less than South Africa. Figures 5.1 and 5.2 still assume that HIV is distributed evenly across income deciles, so each 10th of the HIV+ population represented in the graphs represents 250 potential consumers. Joint United Nations Programme on HIV/AIDS, Epidemiological Fact Sheets on HIV/AIDS and Sexually Transmitted Infections: Norway, December 2006, available at <http://www.who.int/GlobalAtlas/predefinedReports/EFS2006/EFS_PDFs/EFS2006_NO.pdf> (last visited February 17, 2009).+(last+visited+February+17,+2009).+GDP+data+from+the+World+Bank,+supra+note+32.+According+to+UNAIDS+data,+there+are+2500+people+with+HIV/AIDS+in+Norway,+far+less+than+South+Africa.+Figures+5.1+and+5.2+still+assume+that+HIV+is+distributed+evenly+across+income+deciles,+so+each+10th+of+the+HIV++population+represented+in+the+graphs+represents+250+potential+consumers.+Joint+United+Nations+Programme+on+HIV/AIDS,+Epidemiological+Fact+Sheets+on+HIV/AIDS+and+Sexually+Transmitted+Infections:+Norway,+December+2006,+available+at++(last+visited+February+17,+2009).>Google Scholar

Indeed, because of universal drug insurance, the monopolist will be able to sell to all consumers.Google Scholar

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See 't Hoen, E., supra note 20. It is noteworthy that the price discounts that major companies do give in poorer countries for antiretrovirals are based on per capita income, not the degree of inequality in the country. For countries with middle incomes but high inequality, such discounts are likely to be insufficient to address the true nature of the access problem.Google Scholar

See Scherer, and Watal, , supra note 3 (showing that there was in fact very little correlation between national income and pricing of AIDS drugs in a large sample of prices from 1995–1999).Google Scholar

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Other tools may include prize-type mechanisms, price controls, use of formularies, reference pricing, and mandatory rebates. For a discussion of cost control measures used by OECD countries, see International Trade Administration, Pharmaceutical Price Controls in OECD Countries (Washington, D.C.: U.S. Department of Commerce, 2004); Outterson, K. U.S. Senate Testimony on the Dept. of Commerce OECD Drug Pricing Report, U.S. Senate, Health Education, Labor and Pension Committee Hearings, February 2005. We believe that compulsory licenses to create competitive market in developing countries is a preferable tool for a host of reasons that we will not canvass here. See Watal, , supra note 9 (preferring compulsory licenses to price controls for administrative efficiency reasons).Google Scholar

Section 41(4) of Canada's 1969 Patent Act (in place until 1992) created a presumptive right to a compulsory license for any medicine and instructed that “in settling the terms of the license and fixing the amount of royalty or other consideration payable, the Commissioner shall have regard to the desirability of making the medicine available to the public at the lowest possible price consistent with giving to the patentee due reward for the research leading to the invention and for such other factors as may be described.” Under this law, royalties of 4% of the generic sales price were customarily awarded. See Reichman, J. and Hasenzahl, C., Nonvoluntary Licensing of Patented Inventions: The Canadian Experience (United Nations Conf. on Trade and Development/International Center. for Trade and Sustainable Development Issue Paper No. 5: 2002). Section 41 of the UK Patent Act of 1949 created a rebuttable presumption in favor of compulsory licensing to ensure that food, medicine and surgical devices were “available to the public at the lowest prices consistent with the patentees' deriving reasonable advantage from their patent rights.”Google Scholar

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