November 4, 2010

Pharmaceuticals: Oligop-utopia!

In the world of perfect competition, in which everyone is a price taker, perfect information is realized and there is (according to the market model tool) an infinite supply of both buyers and sellers: individuals and business' enjoy free entry and exit into an industry. In other words, barriers to entry are nonexistent and any entity can enter or exit an industry with zero cost.

In the pharmaceutical industry, with global revenues of approximately $640 billion, and an infinite demand, obtaining a piece of this market share would be highly profitable. But just how easy is it to enter this industry? To realize almost unheard of gains in sales of 72% in the first half of 2010, as did the biosimilar company, Sandoz, it doesn’t take much intuition for one to realize the amount of money to be made in a rapid-growing multibillion dollar industry.

There exists an endless demand for cheaper prescription drugs. One must be careful to distinguish between an increase in demand and an increase in quantity demanded. In this case however, a technological advancement will increase actual demand. When demand shifts to the right, the firm will enjoy a profit. Furthermore, the firms in this industry are experiencing a highly positive economic profit.

The pharmaceutical industry obviously reflects oligopolistic competition, which has two important implications. The first implication is that, because the industry is experiencing a positive economic profit, it creates a high incentive for other firms to enter the industry. The second is that firms already in the industry will, according to the article, “fight very hard to protect their patch.”

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