Patent system rewarding innovation

There are really only three possible routes (1) use the commercial market through the patent system to determine the rewards to the innovator, (2) base rewards to innovators on therapeutic benefits, and (3) do not bother measuring at all. Option (1) is the patent system, but this functions poorly for neglected diseases. Advanced Purchase Commitments use option (2) in a half-hearted way, as I describe below. A system of Transferable Intellectual Property Rights, described below, uses option (3). The key issue is that in the absence of meaningful measurement of health impacts, it is necessary to base rewards only on commercial success, and that is not consistent with a mission to improve the health of the poor. 

It is helpful to see how the Optional Reward system relates to the patent system in the way that rewards are allocated. The patent system measures the value of an innovation by the amount of prohts the innovator is able to extract. Such a measure of value, taken directly from market observations, seems to suggest that the value of the lives of very poor people is extremely low. This conclusion follows directly from the fact that poor people spend very little money on health care. This thinking has led some to argue that the allocation of money toward different types of medicines is already efficient. This is a fallacy, since it depends on who is determining what is valuable. 

The pharmaceutical industry produces social goods characterized by high fixed costs, high information and regulatory costs, and relatively low marginal costs of production. While the existing patent system provides for limited monopoly power to reward innovation, it concurrently restricts access to medicines. The industry must balance their... 

The standard pull mechanism is the patent system, which offers the reward of exclusive use of the innovation. The patent system is designed so that innovators with products that are highly valued relative to the cost of manufacture will be able to earn large profits, since the patentee is granted exclusive use of the innovation disclosed in the patent for a period of 20 years. 

One alternative to patents is prize-based incentives (deLaat 1997 Kremer 1998). This type of reward has been proposed for pharmaceuticals as well (Abramocicz 2003 Hollis 2005a, b Shavell and Van Ypersele 2001 Hollis, Chapter 4 Maurer, Chapter 5). Under a prize system, the developer is rewarded for the innovation, as with patents, but the new product is placed in the public domain and prices are set near to marginal cost so that the deadweight loss associated with patents is avoided. The key to the success of a prize system is the degree to which the prizes can be structured to approximate the value of the delivered innovations. 

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