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Donna Kakonge, BJ, MA, TESOL, LLB, ABD
The problem with monopolies, as our AP students have learned, is that a monopolistic firm, left to its own accord, will most likely choose to produce at an output level that is much lower and provide their product at a price that is much higher than would result from a purely competitive industry. A monopolist will produce where its price is greater than its marginal cost, indicating an under-allocation of resources towards the product. By restricting output and raising its price, the monopolist is assured maximum profits, but at the cost to society of less overall consumer surplus or welfare.
Unfortunately, in some industries, because of the wide range of output over which economies of scale are experienced, it sometimes makes the most sense for only one firm to participate. Such markets are called “natural monopolies” and some examples are cable television, utilities, natural gas, and other industries that have large economies of scale.
The existence of economic profits attracts entry, economic losses lead to exit, and in long-run equilibrium, firms in a perfectly competitive industry will earn zero economic profit. The long-run supply curve in an industry in which expansion doesnot change input prices (a constant-cost industry) is a horizontal line.
A monopolist produces the quantity where marginal revenue equals marginal cost. The height of its demand curve at that quantity indicates the price at which that profit-maximizing quantity can be sold.
A pharmaceutical company, or drug company, is a commercial business licensed to research, develop, market and/or distribute drugs, most commonly in the context of healthcare. They can deal in generic and/or brand medications. They are subject to a variety of laws and regulations regarding the patenting, testing and marketing of drugs, particularly prescription drugs. From its beginnings at the start of the 19th Century, the pharmaceutical industry is now one of the most successful and influential, attracting both praise and controversy. (Source: http://en.wikipedia.org/wiki/Pharmaceutical) Although consumers are responsible for footing a relatively large portion of the drug bill, they generally are not responsible for choosing which specific drug to buy. Physicians are usually the ones who prescribe the drug, which entails a lack of financial incentive to make cost-effective choices, usually choosing the high-priced brand name medicine. There is a law now that enables substitution of generic brands by the pharmacist. There are 3 types of barriers that occur when entering the pharmaceutical industry, and they are as follows: Government patent which gives the innovating firm the right to be the sole producer of a drug product for a legal maximum of 20 years. The second barrier to entry is called a first-mover (brand loyalty advantage). The quality of a substitute generic product is generally unknown and requires one to experience it. The last main barrier is the control over a key input, such as a specific chemical or active ingredient, can also make it difficult for new firms to enter a drug market. Which barrier would this hinder given the following situation? A different chemical compostion treats the same disease as an already established drug does. The answer would be the government patent. The patent is granted for a new drug's chemical composition, not its therapeutic novelty.The structure of an industry reflects whether certain markets conditions hold such that firms can exploit their market power and operate inefficiently. Studies have shown both prepatent and postpatent price competition often exist in pharmaceutical markets. The process of both brand-name and generic products are found to be lower when a greater number of substitute products are available.
There are 8 stages to the drug development process.
1. Discovery stage. Basic research synthesis of new checmicals and early studies of chemical properties. Identification of a specific new chemical entity worthy of further testing.2. Preclinical animal testing. Short-term animal toxicity testing for evidence of safety in the short run in preparation for human testing.3. IND filing. A request is made for authorization to begin human testing by filing a notice of claimed investigational exemption for new drug (IND). If there is no hold on the application, the firm begins climical testing 30 days after filing. (42.6 months for the first three stages)4. Phase I of clinical testing. Dosage administered to a small number of healthy volunteers for information on toxicity and safe dose ranges in humans. Data are gathered on the drug's absorption and distribution in the body, its metabolic effects, and the rate and manner in which the drug is eliminated from the body. (15.5 months)5. Phase II of clinical testing. Drug is used on a larger number of people whom the drug is intended to benefit. Evidence of therapeutic effectiveness and additional safety data are obtained. (24.3 months)6. Phase III of clinical testing. Large-scale tests on humans over a longer period to uncover unanticipated side effects and additional evidence of effectiveness. (36 months)7. Long-term animal studies. The effects of prolonged exposures and the effects on subsequent generations are determined. Such studies are typically conducted concurrently with other studies. (33.6 months)8. New drug approval. Application for commercial marketing of the new drug. Review of evidence by the FDA. Marketing for approved uses may begin upon notification by the FDA. (30.3 months)
The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product.
Monopolistic competition as a market structure was first identified in the 1930s by American economist Edward Chamberlin, and English economist Joan Robinson.
Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers.
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