The Future of Obamacare

Well to some extent it has, regardless of how small a step, it was a step to greater equality in the United States. I am not necessarily the firmest believer in government intervention in regards to healthcare, but equally the position American citizens are put in due to the corporate greed and lobbying power of pharmaceutical and insurance companies is an equal evil.

The Patient Protection and Affordable Care act did not go as far as Obama had wanted it to go. However, it has allowed millions of American cover that they otherwise would not have. One would hope that in the worlds super power economy, people do not have to make a tough decision between putting food on the table for the family or having health insurance.

Moreover, it did not lead to the fears of its opposition, as the cost of healthcare in real terms has not increased. The fear now however is that any foundation laid by the act will be undone by the future policy of the Obama administration, in that the specific protection for the Pharmaceutical lobby.

Stiglitz has pointed out the case of how India was forced to take up patent law in 2005, due to the competition Indian pharmaceutical companies were bringing to drug production, and in that the western pharmaceutical lobby’s fears that competition from the generic market. In the 1970s India abolished pharmaceutical patents, and this lead to an industry, which would be capable of providing some degree of healthcare in the developing world.

The Obama administration is seeking a bi-lateral trade deal with India that will ultimately secure the position of the pharmaceutical companies. Critically, along with Obamacare, it is clear that there needs to be an overriding framework that ensures that care and medicine is affordable. Stiglitz argues that this is not an unintentional outcome of the trade deal, but rather an explicit element of US trade policy. Thus, we come back sadly to a trade off between the US and its desire to keep domestic jobs, and protect a well-lobbied industry.

The argument that the rigorous American patent system is ensuring profits for innovation and development is becoming worn out. Stiglitz gives the example of Hepatitis-C treatment, which in India goes for $1,000 per treatment with profitability, but in the U.S. for $84,000. This chasm in prices shows the degree of monopoly power that the U.S. government grants in the healthcare industry, and this bi-lateral trade agreement will only reinforce this if India strengthens its patent laws.

So it is increasingly clear that healthcare in the United States can be approached from a more critical angle, rather than still trying to force an act through that lobbyists call communist, but your rational person would call equitable.

The Patent Dilemma

In simple terms patent law is frustrating. There is a strong rational argument for keeping patents and abolishing them. Those who innovate deserve some kind of compensation for their efforts, however even temporary monopoly leads to inefficiency and does not best benefit society. In the following I will consider the arguments for and against patents.

There are four central arguments that were used to justify the patent system of the 19th century. Taken from the book “The Patent System and Inventive Activity” by H.I. Dutton.

The Natural-Law Thesis

This thesis is based on the assumption that individuals have a natural right to property of their own ideas. Using others ideas was tantamount to theft as it was private property. Even supporters of the patent system would not go far to advance this argument. William Hindmarch noted that an inventor couldn’t have any natural right to prevent another person from making or using a similar invention summarises the breakdown of this thesis, on the basis that being loosely defined no boundaries are set as to what is a unique and individual idea.

Reward by Monopoly Thesis

The base argument of this thesis is that inventors should be rewarded according to the usefulness of their invention, since market forces may not always guarantee it. Adam Smith and John Stuart Mill were patrons of this argument as he noted the importance of the rule of law, and the institutional framework, which corrected market failure.

This is beneficial because allowing inventors monopoly ensured a period where they would gain sufficient return for the effort, without this protection competitors could in theory lower their costs at no cost. Introducing the free riding problem to the benefit of others inventions. In any case there was the argument they were harmless, market forces would determine the profitability from the invention, if it were a useless invention then there would be no reward.

Jeremy Bentham also distinguished between two categories of labor. In that there was the physical variety whereby it could be imitated with similar reward. Then the skilled variety where progress would reduce cost of production, rather than simply add to production.

Monopoly Profit Thesis

Private rewards was a clear incentive to invent, it differs from the rewards argument as it concerns itself with the duration and exclusiveness of the monopoly. Noting that it is economic growth for society that is ultimately desired. So in this sense growth and private profit would go hand in hand. There is evidence for this link in that many claimed that patents were integral to the creation of the most valuable inventions.

There was also the aspect of the speed at which innovation was carried out when patents were under use, this applied to foreigners and domestic inventors as the patent system enabled both equally to pursue invention, while securing the industrial basis of the economy.

Exchange-for-Secrets Thesis

This was based on the 18th century idea of contract, whereby a bargain occurred as one received protection and the other received knowledge. This thesis emphasised the importance of disclosure. This theory was not concerned with output but rather the dissemination of information of the existing technologies.

This had led to the more complex nature of patents, requiring full disclosure of the technology or inventions in a specification, in order for law officers to make provisions for the patent, established in 1734, and emphasised in 1778. Simply put by John Farey patent is the price of disclosure.

Anti-Patent

The greatest fear about patents was the manner in which monopoly was pursued, noting the particular evils associated with monopoly to ward off the use of patents. The counter-argument was rather that patents had brought what was private discovery into the common, and that just because the monopoly existed did not mean that market would demand it, or that an artificial price increase could be maintained. There was also the notion by William Spence that monopoly prompted a specific type of competition.

The main ideology behind the anti-patent movement was on the basis of free trade and the emancipation of industry. This had gained better grounding after the Corn Laws were repealed and the navigation acts took place.

  • Dangers of monopoly, negative effects on workers, manufacturers, etc.
  • No longer necessary due to a mature economy, firms able to compete normally without special privileges
  • The Economist argued it was immoral and economically unsound
  • The lottery nature of patents, whoever got the idea first by chance
  • The inefficiency of how patents were administered, and the lack of protection they actually offered is the main factor that put off inventors.

Against Intellectual Property – Boldrin & Levine

The example of James Watt’s new engine shows the limitations of patents, after initially having to spend six months obtaining a patent, he then spent time combating off rival inventors, to which the patent was then extended. Then after a period of commercial production his advanced engine had only sold 449 units of the 2250 steam engines around. A patent also limited him with the technology he required being the property of James Pickard.

This situation effectively describes Watt as not only an inventor but able to exploit the legal system, noting that his partner had strong connections in parliament. The legal system was used to limit competition, with evidence of limited adoption of steam engine innovation due to Watts’s monopoly. It is also worth noting that Watt spent more time on legal matters rather than inventing. This is summarised as rent seeking behaviour; this is shown through the patent extension that was not needed but favourable for Watt. In the conventional monopoly manner high prices prevented others from entering the market.

Most often attributed to the patent system are the evils of monopoly, corrupt rent seeking, legal suppression of innovation, reduced economic growth, and the los of personal freedom. It is argued that innovation would thrive in the absence of intellectual monopoly. This is brought up next to the concept of free trade and what used to be extreme protectionism. With the authors arguing that today there is the violation of intellectual property laws in that consumers desire cheap books, music, etc. in convenient format and are willing to violate law for it.

The legal framework is as follows in levels of protection of intellectual property: Patents, Copyrights, and Trademarks. Copyright tends to the specific, whereas patents provide broad protection over a general idea. The Right of Sale is a fair concept in that inventors should be able to profit from their work, the right to control however results in prosecution carried out by government.

Intellectual monopoly may be denoted as the right of the owner of the intellectual property to dictate how the purchaser uses the idea and or limiting them. Concept of first mover advantage, should still command a fair premium on the market? Economists favour competition over monopoly on the basis of freedom of contract and well-defined property rights. Shrink-wrap agreements are effectively enforcing collusive contracts. Their argument suggests that the right of sale should be present but then whoever completes a legal purchase and owns a copy now has the right to use the technology however they would like to. The law inhibits the potential of creativity. Similar analogy created between intellectual property and trade restrictions, looking at the transmission of goods being superior under free trade. The reward for invention argument is limited.

Milton Friedman notes the dangers of occupational licensure, but makes a notable point in that there seems to be support for such laws, as the producer group will always be more concentrated then the consumer group (Capitalism and Freedom, Page 143).


The outline of these arguments shows that there is validity in either approach, making the next requirement a look at examples. But rather than making a solution clearer, it goes on to complicate it further.

Take one of the most popular examples: pharmaceutical companies. We understand that there are high costs associated with the research and development of new drugs, therefore firms would like to be compensated for their effort and innovation. However, this tends to price drugs at a level unaffordable for the vast majority of society. Then on the consumer side this means the lack of consumption of a merit good. In the United Kingdom the National Health Service subsidises the cost of drugs in order to ensure and encourage consumption, such as free drugs for those in full time education. Nevertheless, this is limited as the NHS must choose which drugs to subsidise, and what degree to subsidise them. Firms may aggressively price increasing the burden on the NHS, this is often the case with brand new drugs.

Now if we consider paracetamol, the moment the patent ended the market was flooded with new brands all delivering the same product. Now a consumer can get paracetamol of 500mg pills from Sainsbury’s at £0.55, this effectively allows it to be consumed by anyone. The low price a consequence of extreme competition, and economies of scale resulting in mass production.

If we take the idea of altruism and greatest social benefit, we would look to reduce the comprehensiveness of patents. This brings forward the question of how much innovation should be rewarded it terms of length of patent, we leave the market forces to decide how well the innovator fares, but regardless it may stop others from innovating, lead to legal disputes, and tends towards what we see as the “evils of monopoly”. I personally believe that the anti-patent argument tends to over emphasise first-mover advantage, as in a world where communication occurs at increasingly higher speeds, information can be spread quicker then a firm may act.

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Depressing Drugs?

glaxosmithkline-logo

It looks like a certain pharmaceutical company has been caught being rather naughty once again. GlaxoSmithKline is currently being investigated for paying other drug companies to decrease their production of substitute drugs for their profitable antidepressant. This particular drug is known as “Seroxat” and GSK has been caught before with previous “pay-for-delay” agreements.

It is clear that if these allegations are true, that this is a flawless example of monopoly abuse. GSK is the UK’s largest pharmaceutical company and is a key supplier for the National Health Service. The investigation is currently being investigated by the Office of Fair Trading.

There is the potential for this to cause a domino effect, with the Office of Fair Trading beginning to crackdown on various agreements between competitors in the pharmaceutical market. There is a stereotype that pharmaceutical companies are “evil” conglomerates that over price drugs in order to keep their profit margin, and people ill.

This poses a serious issue for the NHS and taxpayers, if this becomes common practice for large pharmaceutical companies then the taxpayers will bear the burden. I would argue that it is unfair to stifle the competitiveness of the market; however it is clear that large companies that innovate will not be rewarded if a competitor can come in and recreate their drug. This is a very well established issue in the pharmaceutical industry as the question of how competitive? has gone on for a while.

The patent for Seroxat ended in 2004, and this led to the flooding of the market with cheaper substitutes. This obviously benefits consumers, but GSK then take a hit to their profits. It is arguable that the 10 year period of the patent was enough to settle the costs of research and development, and add to GSK’s already existing abnormal profit. However, it is clear that large pharmaceutical companies do not want to re-enter a R&D cycle every five years.

Seroxat-antidepressant-pi-001

If it were to be revealed that GSK actively pursued “pay-for-delay” methods, then I believe it is only fair for them to be penalised for these actions. Furthermore, a possible alternative for the pharmaceutical industry would be to introduce a system which regulates the introduction of substitute products into the market. There remains the issue of whether to stifle the competitiveness of the firm, in order to create savings for the NHS and as a result the taxpayer; or keep the market deregulated and encourage the firms to innovate thereby advancing medicine to a higher degree.

GlaxoSmithKline released a press statement stating:

“GSK supports fair competition and we very strongly believe that we acted within the law,”

Now, I hate to point the obvious, and the allegations have not been proven. But I personally feel that GSK is not too certain at all. Two European commissions had already investigated the firm, so it is evident that there is increasing suspicion concerning the firm’s behaviour.

Competition in the pharmaceutical industry is already difficult with extremely high barriers to entry. This is as a result of the expertise required for drug innovation, and developments. There is also the required “capital” machinery for testing and production which small firms cannot attain.

It is clear that in the existing market that GSK is not a “pure monopoly” there is an abundance of other British pharmaceutical companies, but they are not competing at the same level as GSK. The main rivals of GSK are Pfizer, Novartis, and Sanofi. Due to this and several other factors I would argue that GSK is partaking in an oligopoly.

The  argument forms as there several key indicators. Primarily in the pharmaceutical industry there is an ever increasing amount of asymmetric competition, as the technology and science behind the drugs produced becomes more complex the more complicated it is for the average consumer to truly “understand” the product.

A key factor is the existence of many small firms, but there are more than two large firms which have a significant degree of market power. In this case it can be identified as GSK, Pfizer, etc. The market power of the central four firms, dictates the relationship between them and the various aspects of market behaviour.

Moreover, there is the existence of personal decision making, and the factor that the four major firms are price setters. This identifies the existence of market power, in the short term (5-10 years), whereas in the long term (10 years +) firms must create new products to gain the market power edge. However there is still the factor of inter-dependency and this is where there is the game theory aspect in the pharmaceutics market structure. The firms will not collude with each other, but will consider their actions, and possible repercussions.

Finally, there is product differentiation. For a given period of time one company may have an individual product which gives it greater market power. However, after that given period of time substitutes will emerge in the market and reduce the significance of the market power.

These three key identifiers clearly correlate with the behaviour of GlaxoSmithKline, and the other major pharmaceutical companies. Which is why it is notable the GSK is being investigated for breaching competition standards; it would be in their interest to maintain market power and to create an environment in which they are more of a monopoly.

I personally believe that competition is what drives the pharmaceutical industry; this keeps new products coming out and forcing firms into R&D cycles. It is still important to ensure that the firms can compete without the burdensome bureaucracy of regulation. This is why I believe that the current model is benefiting the consumer as much as possible, while maintaining the firm’s desire for profit.

Milton Friedman in his book “Capitalism And Freedom” considers that this form of market power is the lesser of three evils in which the other possibilities are government backed monopoly, or a private monopoly. It is clear that there are drawbacks in this market structure for consumers, but does that not apply to most?

It will be interesting to see how GSK will continue to respond to these allegations, and how market power may shift over time to the largest firm Pfizer.