ExhaustionofIPrightsINationalexhaustionrightsareexhaustedwhentheIPownerplacesaproductonthemarketinthatcountryICannotuseIPtopreventresalewithinthatcountryIOthercountriestreatrightsasexhaustedwhen ID: 346729
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ExhaustionofPatentRightsandParallelTradeMargaretKyleMINESParisTechNovember3,2014 ExhaustionofIPrightsINationalexhaustion:rightsareexhaustedwhentheIPownerplacesaproductonthemarketinthatcountryICannotuseIPtopreventresalewithinthatcountryIOthercountriestreatrightsasexhaustedwhen rstsoldelsewhereIDierentnationalpoliciesfordierentformsofIP,dierenttradingpartnersIWhenrightsareexhausted,pricearbitrageispossibleExhaustionKyle ParalleltradeI(Orgreymarkettrade,orproductdiversion,orreimportation)ArbitrageofinternationalpricedierencesofproductswhoseIPisexhaustedIImportantinmanysectorsILuxurygoodsITextbooksISoftwareIEspeciallyimportantinpharmaceuticalsINational-levelpricecontrols,dierencesinincomelevels�-widevariationinpricesI�-ResponsesbyoriginatorsthatmaylimitaccessExhaustionKyle Bene tsofexhaustionIReducesenforcementcostsforgovernmentsIRemovesapotentialbarriertotradeIEnablescompetitionindistributionchannelsIArbitrage�-moreuniformpricingExhaustionKyle Isuniformpricingdesirable?IProbablynot,inaglobalsense.IMoststandardeconomicmodelspredictthattotalwelfareishigherunderdierentialpricing.IButthebene tsandcostsarenotequallydistributed.IDe nitelynot,forpoorercountries.IAuniformpricechosenbyamonopolistwillbetoohighinpoorercountries.IRiskofwithdrawalfrompoorercountries,orrationing.ExhaustionKyle Isuniformpricingdesirable?IProbablynot,inaglobalsense.IMoststandardeconomicmodelspredictthattotalwelfareishigherunderdierentialpricing.IDe nitelynot,forpoorercountries.IAuniformpricechosenbyamonopolistwillbetoohighinpoorercountries.IRiskofwithdrawalfrompoorercountries.INational-levelpricecontrolsforpharmaceuticalsareexplicitlypermittedintheEUpreciselybecauseofaccessworries.ExhaustionKyle CounterargumentsIOriginatorswill ndotherwaystoimplementdierentialpricing.ISecond-degreepricediscriminationratherthanthirddegreeIUseoflicensingratherthansales,otherchangestocontractsIOriginatorsdon'tusedierentialpricingtopromoteaccessevenwithnationalexhaustion.IOnlytherichestconsumersinpoorcountriesaretargeted,withhighprices.IIftrue,exhaustionwillhavelimitedeects.ExhaustionKyle EmpiricalevidenceIMostlyconcernsparalleltradeofdrugswithintheEU.ICountry-levelstudies:high-pricecountries(Germany,Sweden)generallybene tfromlowerprices.IPan-EUstudies:pricedierentialspersist;extentofparalleltradevariesconsiderablybycountry.INon-priceresponsesareimportant:IDelayedlaunch,supplyinterruptions(rationing)inlow-pricecountries.IProductdierentiationtomakeparallelimportslesssubstitutable.ExhaustionKyle EmpiricalevidenceIOutof2342EMAlicensesforparalleldistributionin2013:IGermanydesignatedasimporterfor1065ISources:CZ(1002),RO(965),PL(956),BG(855)ISimilarpatternsfornational-levellicensesITop5sourcesforNorwayin2013:PL,BG,CZ,RO,ITIRelativeGDPpercapitais3-14XhigherinNorwayExhaustionKyle SurveyevidenceISurveyofproductdiversioninmiddleandlowincomecountriesfundedbyDfID.ITargetrespondents:pharmamanagers,distributors,NGOsindevelopingcountriesIQuestionsonextentofproductdiversion,andpre-emptivestepstopreventit.IResponsesindicateconcernoverintra-countrydiversionaswellasdiversionbetweencountriesIHowever,littledata(eveninternally)onthemagnitudeIFullresultstobereleasedinthecomingweeks...ExhaustionKyle AnecdotalevidenceIGreeceexperienceddrugshortagespost-crisis.IParalleltradecitedasonecause.ICanadianpharmaciesexperienceddrugshortagesintheearly2000s.IInternetpharmaciesshippingtotheUS.ICross-borderpurchasesbyindividuals.ExhaustionKyle iPhonepriceas%ofGDPpercapita ExhaustionKyle OtherconsequencesofparalleltradeIOriginatorsarguethatparalleltradecreatesqualityrisks.IOriginatorsarguethatparalleltradelowerspro ts,andthereforeR&D.IEconomicmodelswithoutastrategicregulator(usingpricecontrols)generallyagree.IHowever,optimalpolicydependsonconsumerbene tsaswell.IIstheadditionalR&Dwelfare-enhancing?IParalleltrademightreducefree-riding.ISettingalowpricelocallyhasalargerimpactonglobal rmpro tsIInresponse,regulatorsinlow-pricecountriesshouldraisepricesiftheycareaboutR&Dincentives.IBene tsaccruemainlytorichcountriesandoriginators.ExhaustionKyle DierencesacrosscountriesandsettingsINegativeeectsofexhaustionaregreatestwhen:IAlarge,rich(highprice)countryallowsparallelimportsfromsmall,poorer(lowprice)countries.ISafetyorqualityrisksaresigni cant.IScopeforseconddegreepricediscrimination(versioning)islimited.IPositiveeectsofexhaustionaregreatestwhen:IPricedierencesre ectmarketine cienciesratherthandierentialpricing.IParalleltradeenablesaccessthatwouldnototherwiseoccur.ISuggestsappropriatepolicydiersbycountryandsector.ILackofalignmentofnationalinterestscanbeproblematic.ExhaustionKyle