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Liability rules are the default form of protection for digital broadcasting of copyrighted music in the U.S., for example, where “certain non-interactive digital audio services [may] transmit sound recordings under a compulsory license, provided that the services pay a reasonable royalty fee and comply with the terms of the license.” Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings, 37 C.F.R. §260 (2007); see 17 U.S.C. 106(6) & 114(d) (2001). Liability rules are also used to compensate American agricultural chemical companies when competitors use their test data submitted to the FDA for regulatory approval under the Federal Insecticide, Fungicide, and Rodenticide Act. SeeBasheer,S.,“Protection of Regulatory Data Under Article 39.3 of TRIPS: A Compensatory Liability Model?” (Intellectual Property Institute, forthcoming2008).Google Scholar

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In a perfectly competitive market, each firm is a price “taker,” and must accept the market price, which competitors drive down until it is approximately equal to the firm's marginal cost. Patented items in an imperfect, but still competitive, market will be restrained by the same market forces to a greater or lesser extent depending on the degree to which substitutes are functionally equivalent.Google Scholar

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Normally, a diagram of monopoly pricing would include a marginal cost curve. The equation of marginal cost to zero approximates a simplified pharmaceutical market characterized by high fixed costs of R&D, but relatively small production costs (including the active pharmaceutical ingredients used to manufacture medicines). The marginal cost of production in the pharmaceutical industry is typically close to constant, since for most drugs inputs are available in competitive global markets. This is not true of all drugs. For example, Taxol originally used a natural ingredient derived from the yew tree and so there were biological limits to the amount that could be harvested, but for most other drugs, the costs of manufacturing are more or less constant, and therefore the incorporation of a marginal cost curve would not change the basic economic analysis.Google Scholar

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Generally, the exclusive marketing right to which we refer would be granted by a patent. But other such rights, for example those created by “data exclusivity” protections that prevent generic products from being registered for sale for a period of time based on the safety and efficacy data submitted by the innovator firm, may cause similar access problems.Google Scholar

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In principle, sick individuals could borrow against expected future earnings to finance purchasing the drug today. But banks will not in general lend on that kind of basis, and so no such borrowing is possible.Google Scholar

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Our assumptions understate the steepness of the demand curve for the higher income segments since, in fact, wealthier segments of the population are likely to be willing and able to spend a greater share of their income on a needed good. AIDS is also not evenly distributed, but rather is concentrated among urban populations with somewhat higher incomes and mobility. SeePiot,P.,Greener,R. andRussell,S.,“Squaring the Circle: AIDS, Poverty and Human Development,”PLOS Medicine4, no.10 (2007) (noting that AIDS is “more concentrated among the urban employed and more mobile members of society, and consequently the more wealthy groups”).CrossRefGoogle Scholar

Figure 2 is indeed exactly based on this income distribution.Google Scholar

SeeIncome and Expenditure Survey (IES) 2000, Statistics South Africa,available at <www.statssa.gov.za> (last visited February 17, 2009) showing that the average South African household in the top 20 percent income bracket spends three to five percent of their income on out-of-pocket medical expenses, including medicines; see alsoIntegrated Household Survey1993,World Bank,available at <www.worldbank.org/html/prdph/lsms/country/za94/za94data.html#top> (last visited February 17, 2009). Five percent of income also appears to be a reasonable maximum for out of pocket health expenditures in the U.S. SeeSonger,T. J.,LaPorte,R. E.,Lave,J. R.,Dorman,J. S. andBecker,D. J., “Health Insurance and the Financial Impact of IDDM in Families with an IDDM-affected Child”Diabetes Care 20, no. 4 (1997): 577-584.; 42 CFR § 457.560 (requiring participating states to cap poor family contributions to health at 5 percent of income).Google Scholar

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As noted above, the prevalence of HIV/AIDS is not uniform across deciles, but higher among South Africans with higher incomes. We assume uniformity in order to simplify our demonstration that a firm will maximize sales by selling exclusively to the elite. If we were to weigh demand at each income decile to account for differences in prevalence of HIV/AIDS, it would lead to an even greater difference between demand and sales at the upper and lower income deciles (firms would beless likely to sell to the middle and lower classes).Google Scholar

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Since the marginal cost of production is usually very low and nearly constant across production levels, we are showing total revenue instead of marginal revenue and marginal cost. SeeParkin,,supra note 14.Google Scholar

In fact, the profit maximizing price may serve a much smaller segment of the population, as world prices of over $10,000 annually for AIDS medicines in the pre-2000 period suggests. Unfortunately, accurate data for segments of the population smaller than a decile are not readily available.Google Scholar

Norway also has an excellent health insurance system so that in principle income need not be a barrier for anyone to obtain needed drugs there. Also, we are once again assuming uniformity in HIV/AIDS prevalence across income deciles.Google Scholar

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Other tools may include prize-type mechanisms, price controls, use of formularies, reference pricing, and mandatory rebates. For a discussion of cost control measures used by OECD countries, seeInternational Trade Administration,Pharmaceutical Price Controls in OECD Countries (Washington, D.C.:U.S. Department of Commerce,2004);Outterson,K.U.S. Senate Testimony on the Dept. of Commerce OECD Drug Pricing Report, U.S. Senate, Health Education, Labor and Pension Committee Hearings, February 2005. We believe that compulsory licenses to create competitive market in developing countries is a preferable tool for a host of reasons that we will not canvass here. SeeWatal,,supra note 9 (preferring compulsory licenses to price controls for administrative efficiency reasons).Google Scholar

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