Against Intellectual Monopoly

sub-segment would be on the order of U.S. $305 million, or about 50% of the sales
of the entire systemic anti-bacterials segment in 2000. Of this amount, foregone profits of domestic producers constitute roughly $50 million. The overwhelming
portion of the total welfare loss therefore derives from the loss of consumer welfare.
In contrast, the profit gains to foreign producers in the presence of price regulation
are estimated to be only around $19.6 million per year.24

    Other observers, looking at the big picture, are less negative. Interestingly, though, we have not been able to find a single independent analyst
claiming that the additional amount of pharmaceutical innovation patents
may stimulate in the Indian industry will be substantial and large enough
to compensate for the other social costs. More to the point, the positive
consequence of patent adoption in countries like India is, according to most
analysts, a consequence of beneficial price discrimination. The argument
goes as follows: monopoly power allows price discrimination - that is, the
sale of the same good for a high price to people valuing it a lot (usually
people richer than average) and for a low price to people valuing it little
(usually people poorer than average). As a result of the absence of patent
protection, there are very many new drugs that are not marketed in poor
countries by their original producer, as the latter is not protected by reliable
patents in that country. If it were, the profit-maximizing monopolist would
have an incentive to quickly introduce those drugs, at prices lower than in
rich countries, also in poor countries. This would increase the welfare of the
poor country's residents, as they would receive the medicine earlier rather
than later.
    Although the argument sounds perfectly logical (leave aside the issue of
how large the gains from this earlier marketing of new medicines would be),
there are two points its advocates either do not notice or underplay. The
first has to do with retrading, otherwise known as "parallel import" or free
trade, if you like. If a drug is sold more cheaply in country X than in country
Y, there is an incentive to set up a firm shipping the drug from X to Y, as
many Americans and Canadians have recently discovered. Hence, the full
requirement for poor countries is not just to adopt Western-style patents,
so that price discrimination by the monopolist can benefit them, but also
to restrict free trade. An interesting twist, given that the idea comes from
the World Trade Organization, an international organization erected and
financed to support and expand free trade worldwide! The second doubt
comes from the following observation: if it were really true that imitating
and pirating new drugs were that easy, absent patent protection, local firms
would be already producing and marketing such drugs in the country in
question. Hence, the arrival of the foreign patent holder's output could not
really increase the welfare of local consumers, as it would purely replace that
of existing local suppliers. This conclusion seems unavoidable, unless one is willing to argue that the marginal cost of producing drugs is not constant,
or that imitation and reverse engineering are not all that cheap, or that the
initial inventor has some cost advantages over its imitators. But then, once
either of the last three points is admitted, the whole argument for patent
protection fails in the first place, and we are back to square zero: qui prodest?

The Pharmaceutical Industry Today
    In spite of the fact that between 1985 and 2005 a long string of almost fifty
mergers and acquisitions led to a progressively more concentrated pharmaceutical industry, it is still hard to argue, from a worldwide perspective, that
the pharmaceutical is a monopolized industry. True, a few large companies -
about fifteen and possibly shrinking soon - hold a dominant position
throughout the world, all of them based in the United States, Germany,
the United Kingdom, Switzerland, and France. Still, the distance in sales
between the companies ranked No. 15 and No. 16 in 2004 was $600 million,
out of about $10 billion, and the list of the top fifty pharmaceutical and
biomedical company looks more like a smooth continuum, starting at $52
billion with Pfizer and ending at $1.5 billion with Tanabe Seiyaku, with the
two biggest percentage drops in sales between No. 2 (Johnson & Johnson)
and No. 3