Bacterial cross-resistance and entry deterrence in a market for antibiotics

Purpose The goal of the paper is to explore the deterrence strategy of a firm holding a patent on an antibiotic drug when confronting a threat of entry under varying conditions regarding bacterial cross-resistance to prospective competing antibiotic drugs. A second goal is to draw policy implications regarding patent policy as an instrument for combating antibiotic resistance. Design/methodology/approach A two-period model is used to study the output decisions of a patent-holding incumbent confronting potential entry in the second period. First-period output decisions influence the effectiveness of the incumbent antibiotic and prospective competitors in the second period. We compare equilibrium output decisions under varying conditions regarding (1) the duration and scope of patent protection and (2) the degree of bacterial cross-resistance to prospective second-period entrants. Findings Entry deterrence is more likely (less costly) as prospective entry costs for rivals increase. Whereas entry deterrence against generic competitors requires incumbents to increase output in the first period relative to a setting wherein the threat of entry is absent, a lower output level in the first period is a feature of an optimal entry deterrence strategy when prospective rivals benefit from a low level of bacterial cross-resistance. Stronger patent protection will not necessarily incentivize the patent holder to moderate current use such as to preserve antibiotic drug’s future effectiveness. Originality/value The model contributes an important theoretical counterpoint to policy proposals advocating for stronger patents in response to the problem of antibiotic resistance. It also enriches the industrial organization literature on product quality differentiation (incumbent choice of first-period output affects the quality differential between antibiotics in the second period).