Compulsory license threats in a signaling game of drug procurement

This paper presents a signaling game to formalize the interaction between a developing country and a pharmaceutical firm negotiating the supply of an essential medicine. During these negotiations, the government may threaten the firm with the issue of a compulsory license to force price reductions. However, the threat may be a poor signaling device of the government’s willingness to issue a compulsory license. Our model shows that, for a government, the threat may be used in various ways to fool the pharmaceutical firm about its real objectives. This result is consistent with stylized facts showing that threat strategies are used to obtain very opposite outcomes.