This thesis consists of three papers. Industries that motivated this analysis range are exclusive clubs (Chapter 1) and pharmaceuticals (Chapters 2 and 3). A common thread is the study of the strategic behavior of monopoly or monopoly-like firms and the implications of such behavior. Chapter 1 studies an “invitation only” strategy for a durable goods monopolist. “Invitation only” functions as a commitment device, enabling the extraction of more profit than the conventional durable goods setting. In addition, the effectiveness of commitment devices in profit-extraction can be compared: each commitment device is modeled as an extra condition in the profit maximization of the general durable goods monopolist, enabling straightforward comparisons across commitment devices. Chapters 2 and 3 discuss the effect of patent protection on innovation in the pharmaceutical industry, in particular competition to produce drugs that follow-on from pioneer drug discovery, and any feedback effects on pioneer innovation. Despite the conventional notion, I show that longer patent protection may reduce or distort the incentives of innovation: with longer patents, the increased need of pioneer inventors in deterring the production of follow-on drugs may translate to less profitability for the pioneer inventor. Chapter 2 serves as a background and a literature review for Chapter 3. It explains the multi-stage drug discovery process and the phenomenon of follow-on drugs; it reviews strategic entry deterrence theories and summarizes the behavior of brand-name drug firms in deterring generic entry studied in the literature; it also reviews the optimal patent length and breadth literature. Chapter 3 presents several observed puzzles in the pharmaceutical industry and provides a unified explanation for these puzzles within a strategic entry deterrence model. The central conclusion is that under some general conditions, longer patent life distorts incentives for innovation and lowers research productivity: pioneer research is discouraged relative to follow-on research; inexpensive R&D projects are discouraged, and ceteris paribus expensive projects are favored instead, especially those with large clinical trial costs. Other predictions from the model accord with industry observations, including mid-development cancellations of potential drugs for non-medical reasons and early development of follow-on drugs in large markets.

This thesis consists of three papers. Industries that motivated this analysis range are exclusive clubs (Chapter 1) and pharmaceuticals (Chapters 2 and 3). A common thread is the study of the strategic behavior of monopoly or monopoly-like firms and the implications of such behavior. Chapter 1 studies an “invitation only” strategy for a durable goods monopolist. “Invitation only” functions as a commitment device, enabling the extraction of more profit than the conventional durable goods setting. In addition, the effectiveness of commitment devices in profit-extraction can be compared: each commitment device is modeled as an extra condition in the profit maximization of the general durable goods monopolist, enabling straightforward comparisons across commitment devices. Chapters 2 and 3 discuss the effect of patent protection on innovation in the pharmaceutical industry, in particular competition to produce drugs that follow-on from pioneer drug discovery, and any feedback effects on pioneer innovation. Despite the conventional notion, I show that longer patent protection may reduce or distort the incentives of innovation: with longer patents, the increased need of pioneer inventors in deterring the production of follow-on drugs may translate to less profitability for the pioneer inventor. Chapter 2 serves as a background and a literature review for Chapter 3. It explains the multi-stage drug discovery process and the phenomenon of follow-on drugs; it reviews strategic entry deterrence theories and summarizes the behavior of brand-name drug firms in deterring generic entry studied in the literature; it also reviews the optimal patent length and breadth literature. Chapter 3 presents several observed puzzles in the pharmaceutical industry and provides a unified explanation for these puzzles within a strategic entry deterrence model. The central conclusion is that under some general conditions, longer patent life distorts incentives for innovation and lowers research productivity: pioneer research is discouraged relative to follow-on research; inexpensive R&D projects are discouraged, and ceteris paribus expensive projects are favored instead, especially those with large clinical trial costs. Other predictions from the model accord with industry observations, including mid-development cancellations of potential drugs for non-medical reasons and early development of follow-on drugs in large markets.