imitators, and thus their lower costs might to some extent offset the market power effect.

In this paper, we explore the effects of introducing product patents for one particular therapeutic segment of the Indian pharmaceutical market - the market for CNS (Central Nervous System) drugs. The CNS market is the second largest therapeutic category in terms of retail sales in the world and is one of the fastest growing segments in India (Goldberg 2006). We use proprietary data on pharmaceutical sales in India<sup>1</sup> from 2003 to 2008, and link these data on when product patents were granted. We differentiate between two types of product patents. As described by Hemphill and Sampat (2010), a product patent claiming the active ingredient is generally the strongest and is likely to prevent any use of the same drug. In contrast, ancillary patents on chemical variants, alternative formulations, delivery systems, and relatively minor aspects of the drug may not exclude generic entry, since a local manufacturer may be able to employ a different, non-infringing mechanism for accomplishing a similar incremental drug innovation.

Our identification strategy exploits the differential timing of product patents across drugs during the 2003 to 2008 time period. Our key identifying assumption is that the timing of the patents is not correlated with other unobserved factors that might affect the price and utilization of the drug. Our findings suggest that the introduction of product patents was associated with a significant increase in the share of total quantity sold by the innovator, especially for patents granted to the drug compound. The share did not increase to 100 percent in most cases because innovator firms could still grant voluntary licenses to generic firms to manufacture and sell their products. We also find an increase in average prices after the introduction of stronger product patents, although there is no detectable significant effect on utilization. The analysis underscores the importance of investigating the type of product patent granted by the government.

The findings contribute to the growing theoretical and empirical work on the effect of patent policies on the pharmaceutical industry. For instance, price responses to generic entry in the markets for generics and brand-name drugs that have lost patent protection in the United States have been studied by Caves et al. (1991), Grabowski and Vernon (1996), Frank and Salkever (1997), Berndt (2002), Wiggins and Maness (2004), Reifan and Ward (2005), Ellison and Ellison (2007), who find that market entry by generics resulted in heterogeneous responses in price based on the segmentation of the pharmaceutical market.

Several studies have also used explicit models of consumer and firm behavior to simulate the welfare losses implied by patent protection in developing countries (Challu (1991), Fink (2000), Maskus and Konan (1994), Nogues (1993), Subramanian (1995), Watal (2000)). The paper most relevant to our study is by Chaudhuri, Goldberg and Jia (2006) who analyzed the effects of patent enforcement for a sub-segment of antibiotics in India using a structural approach to compute own and cross-price elasticities of demand as well as the marginal costs of production. While their findings (and the findings in previous literature) are ultimately limited by the fact that the potential

> 1 This data is similar to the data used for the U.S. market in Duggan and Scott Morton (2010).

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