Welfare Effects of Compulsory Licensing

This paper derives necessary and sufficient conditions for compulsory licensing to increase consumer surplus and total welfare, taking into account both static (technology transfer) and dynamic (innovation) effects. When the risk-free rate is low, compulsory licensing is shown unambiguously to increase consumer surplus. Compulsory licensing has an ambiguous effect on total welfare, but is more likely to increase total welfare in industries that are naturally less competitive. Finally, compulsory licensing is shown to be an effective policy to protect competition per se. The paper also demonstrates the robustness of these results to alternative settings of R&D competition and discusses their significance for the debate on compulsory licensing in the context of standard-setting organisations and pharmaceutical trade.