Douwe Osinga's Blog: Patens and medicine

Friday, June 20, 2003

Do patents work? They seemed to have worked in the nineteenth for getting all those nice technical inventions out there. Pharmaceutical companies use them a lot and so do software companies and biological companies now. It always has been a bit strange: patents are supposed to create innovation by allowing monopolies, not really institutions known for innovation.

Copyright, patents and brands have been used to make the information society possible, that is, to make the production of knowledge much like the production of things. Of course the production of knowledge is not like the production of things at all. Information can be copied without cost. Things always have the monopolistic property that they can have only one owner.  Information as they say wants to be free.
Innovation however, sometimes needs motivation beyond curiosity.  Medical research costs a lot of money, as does some industrial research. Without the protection of patents nobody would undertake this kind of endeavours, or so the reasoning goes. Without copyright protection, writers wouldn't write, composers wouldn't compose etc, etc. The last bit is not true. Writers have written, composers composed and painters painted since the dawn of time without any kind of protection. I'm writing this because I like to, not because the copyright protection. But you can't really build an industry around it and as our society becomes more and more an information society, this becomes a problem.

Let's focus on medical research here for a bit. Patents allow medical companies to make their money back, the money they spend on medical research. This works, but is not a very efficient way of doing things from society's point of view.

Have a look at the graph to the left. A company has produced a new drug and is selling this drug at monopoly price p1. The line is the price/demand relation. People that can afford p1 effectively have to pay back the research costs. This results in a demand of q1 and gives us our company revenue of q1*p1 is the striped area. For society as a whole the deal is that it has to pay q1*p1 each year to pay back the research done for the medicine.  Clearly there is enough demand for it. In a market environment, however, this leads to the situation where more then half of the people do not get the medicine, even if it could be produced against little extra cost. Indeed this is happening with Aids.

If we would somehow succeed in getting in a way that the price depended on the income of the people, everybody would win. The people that can afford prices>p1 will have to pay less then before, because the people that could not afford the medicine will now pay something of the p1*q1 amount of money needed. The people that couldn't afford p1 before obviously win, because now they get the medicine for a price they can afford.

Manipulating the market for better outcomes tends not to work, but the example above shows that the current situation is sub-optimal. Some other day, I'll post about a solution I thought of.