Patent Duration, Breadth and Costly Imitation: Evidence from the US Pharmaceutical Market

We investigate how changes in patent breadth and duration affect the imitation of new, patented drugs, and what those effects imply for the optimal patent policy design. We first formalize predictions of the basic theory of patent breadth and length, and derive a simple, testable rule for the optimal policy design that only requires data on generic firms' investments prior to patent expiration. We then test this theory in the US pharmaceutical industry where the Drug Price Competition and Patent Term Restoration Act of 1984 increased patent duration - by introducing term extensions that compensate for delays in regulatory approval process - while simultaneously narrowed breadth. Using two quasi-experimental approaches, we find evidence that suggests the probability of imitation increases with patent length and decreases with patent breadth. Our findings are consistent with the idea that society would benefit more from broader rather than longer patent protection.