Significance
The WTO’s agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires all signatories to provide patent protection for pharmaceutical products and processes. Despite this unprecedented level of global protection for intellectual property rights, counterfeit drugs are everywhere. The world market for pharmaceuticals totaled $480 billion in 2002. While measures of counterfeiting are imprecise and difficult to come by, the best estimates place the level of counterfeiting near 10 percent. In some countries, the share of counterfeit drugs in circulation is estimated at more than 70 percent.¹ This paper examines the impact of increasing intellectual property rights on the market for counterfeit drugs in developing countries; it focuses on the transition to effective levels of enforcement.

Setting & Assumptions
The paper models a market where consumers have varied tastes and pharmacists can sell either brand-name drugs or their generic equivalents. Brand-name drugs, however, may be counterfeited. The model assumes that counterfeit drugs are worthless, and that only the pharmacist selling the brand-name drugs knows which items are real and which are not. Consumers are sensitive to the brandedness of the pharmaceuticals they purchase, as well as to the price. In addition, they are aware of the overall percentage of fakes on the market. Consumers weigh the options and then choose whether to purchase generic drugs or brand-name drugs that might be counterfeit.

This model examines the quality mix and pricing decisions of the pharmacists in response to changes in intellectual property legislation and enforcement against the sale of counterfeit drugs. Initially, the representative developing country lacks any protection for intellectual property rights and the market is composed of real brand-name drugs, fake brand-name drugs, and generics. After signing an international trade agreement, the developing country begins to provide protection for intellectual property rights. This strengthened commitment to intellectual property rights makes it impossible for government officials to ignore the firms that produce generic copies of on-patent pharmaceuticals. Through a selective pattern of enforcement—common practice in developing countries—these firms and their generic copies disappear, but the more elusive counterfeiters are not rooted out.

Results
Without a concurrent commitment to enforcement, stronger IP protection may do more harm than good. The results suggest that the institution of stronger IP protection removes efficacious generics from the market, increasing profits for patent holders and tempting counterfeiters to step in. On the other hand, effective enforcement improves the quality mix of the drugs available and eliminates the harm done to the reputations of international pharmaceutical firms when their products are counterfeited. The welfare gains that enhanced enforcement offers both consumers and producers provide a strong incentive for manufacturers and governments to share the costs of enforcement. Pursuant to the TRIPS Agreement, the number of countries that are moving from limited intellectual property rights protection to a comprehensive commitment to intellectual property rights protection makes this issue timely. The policy implications are particularly important, for governments in developing countries with limited enforcement resources, for the pharmaceutical industry, and for others that face similar problems, such as the software and entertainment industries.

Notes
1. Pharmaceutical Society of Nigeria, as cited in Abiodun Raufu, “India agrees to help Nigeria tackle the import of fake drugs,” BMJ, 326, 7 June 2003, p.1234.