Patents: costs/benefits
Subject: patents (cost/benefits)
Details: If patents permit firms to set P>MC (P might be ten times MC or in extreme cases even 100xMC), this implies very large ?gross margins?- in accounting terms the spread between sales revenues and the cost of goods sold, before allowances for contributions to fixed costs and other costs not directly related to production. What incentives and capabilities (consider both) does this large gross margin create of advertising? Is it then surprising that drug that drug companies?strictly for profit firms?spend about twice as much for advertising (primarily to physicians) as they do for research? (They do not advertise this fact.) Thus consider the link between patent protection and the scale of advertising budgets. How might one think about the private and social costs, the opportunity costs of resources used in advertising, relative to their benefits? Could patent protect provide resources and incentives to support the transfer of information to prescribers about new therapeutic possibilities (a social benefit)? Or might it be a way of buying ?inappropriate prescribing? to the benefit of drug marketers (a private benefit, and social cost)? How might one tell?
Patents operate powerfully to encourage innovation. But can there be too much innovation? Explain, again considering the difference between the private and the social benefits from innovation. What considerations would guide a profit-maximizing firm in deciding how to allocate its research budget? )Go a little deeper than ?Where it thinks it can get the largest profit?!) What considerations might the general public, you or I, want to have determining research priorities?