Pay‐for‐delay with settlement externalities

Motivated by recent antitrust cases in the pharmaceutical industry, this article studies the interplay between pay-for-delay settlements, licensing deals and litigation. Our analysis highlights the externalities that they generate: pay-for-delay settlements reduce competition which encourages entry; licensing and litigation make entering less pro table. Faced with multiple entrants, the incumbent exploits these externalities by o ering licensing deals to some entrants or by pursuing litigation in order to decrease the cost of delaying contracts o ered to others. The number of delayed entrants increases with patent strength. Entrants without pay-for-delay settlements pursue litigation for patents of intermediate strength; otherwise, they receive licensing deals. ∗We are grateful to Patrick Rey, Yassine Lefouili, Marc Ivaldi, Doh-Shin Jeon, Bruno Jullien, Klaus Kultti, Massimo Motta, Jorge Padilla, Martin Peitz, Carl Shapiro, Juuso Välimäki, and participants at the 15th IIOC, the 12th CRESSE conference, and 44th EARIE conference, and seminars in the Aalto University and the Toulouse School of Economics, for helpful comments. Matias Pietola gratefully acknowledges nancial support from the Yrjö Jahnsson Foundation and the Finnish Cultural Foundation. Emil Palikot gratefully acknowledges support from the European Research Council under the Grant Agreement no. 340903. The working paper version of this article won the AdC Competition Policy Award 2018. †Toulouse School of Economics (TSE), University of Toulouse 1 Capitole, Toulouse, FRANCE, emil.palikot@gmail.com. ‡Toulouse School of Economics (TSE), University of Toulouse 1 Capitole, Toulouse, FRANCE, matias.pietola@iki. .