Case study: Monopoly pharmaceuticals versus generic pharmaceuticals:
The pharmaceutical industry relies on patents more than most: successful pharmaceuticals require significant prior investment in research and development (R&D), yet competitors can cheaply copy them once they are on the market. The patent system restricts such free riding giving patentees a period of market exclusivity. It allows a reward for past investments and, more importantly, provides incentives for continued innovation.
Patents also have negative effects. They may increase prices – and so restrict supply – by more than the amount required to provide the necessary incentives to innovate. These negative features are important because they impact on human health. And though innovators seeking to patent must disclose considerable information about their inventions - thus providing a platform to others for further innovation - patents can also restrict further innovation by increasing legal risks and constraining competition in follow-on innovation.
Thus, the question of how much patent protection to offer is crucial. Pharmaceutical patent rights that run for too long or that are defined too expansively will deprive people of drugs because purchasers, including Governments, cannot afford them. They can also constrain follow on innovation: too weak a patent system means patients will suffer because the industry has inadequate incentives to develop new drugs.
(Source: Harris, T., Nicol, D., Gruen, N. 2013 Pharmaceutical Patents Review Report, Canberra.)
Given the scenario, it’s crucial that that when a pharmaceutical firm discovers a new drug, patent laws must give them a monopoly on the sale of that drug. However, since this can restrict the market availability of that medicine, the patent must not be too long. Once the patent runs out, the medicine can be made and sold by any other competing firms. At that time the market switches from monopolistic to being competitive. Given this structure of pharmaceuticals, answer the following two questions:
Question 1: Total 10 points
a) Explain how the innovating pharmaceutical firm gains monopoly under the patent laws.
b) How should the price be determined by the monopoly pharmaceutical during the life of the patent? Justify your answer with appropriate diagram/s.
c) Who are the winners and who are the losers under this market structure?
Question 2: Total 10 points
a) Explain why the generic pharmaceutical is competitive.
b) How should the price of the medicine be determined when the patent runs out? Justify your answer with appropriate diagram/s.
c) Who are the winners and who are the losers under this market structure?
Case study: Monopoly pharmaceuticals versus generic pharmaceuticals:
The pharmaceutical industry relies on patents more than most: successful pharmaceuticals require significant prior investment in research and development (R&D), yet competitors can cheaply copy them once they are on the market. The patent system restricts such free riding giving patentees a period of market exclusivity. It allows a reward for past investments and, more importantly, provides incentives for continued innovation.
Patents also have negative effects. They may increase prices – and so restrict supply – by more than the amount required to provide the necessary incentives to innovate. These negative features are important because they impact on human health. And though innovators seeking to patent must disclose considerable information about their inventions - thus providing a platform to others for further innovation - patents can also restrict further innovation by increasing legal risks and constraining competition in follow-on innovation.
Thus, the question of how much patent protection to offer is crucial. Pharmaceutical patent rights that run for too long or that are defined too expansively will deprive people of drugs because purchasers, including Governments, cannot afford them. They can also constrain follow on innovation: too weak a patent system means patients will suffer because the industry has inadequate incentives to develop new drugs.
(Source: Harris, T., Nicol, D., Gruen, N. 2013 Pharmaceutical Patents Review Report, Canberra.)
Given the scenario, it’s crucial that that when a pharmaceutical firm discovers a new drug, patent laws must give them a monopoly on the sale of that drug. However, since this can restrict the market availability of that medicine, the patent must not be too long. Once the patent runs out, the medicine can be made and sold by any other competing firms. At that time the market switches from monopolistic to being competitive. Given this structure of pharmaceuticals, answer the following two questions:
Question 1: Total 10 points
a) Explain how the innovating pharmaceutical firm gains monopoly under the patent laws.
b) How should the price be determined by the monopoly pharmaceutical during the life of the patent? Justify your answer with appropriate diagram/s.
c) Who are the winners and who are the losers under this market structure?
Question 2: Total 10 points
a) Explain why the generic pharmaceutical is competitive.
b) How should the price of the medicine be determined when the patent runs out? Justify your answer with appropriate diagram/s.
c) Who are the winners and who are the losers under this market structure?
Case study: Monopoly pharmaceuticals versus generic pharmaceuticals:
The pharmaceutical industry relies on patents more than most: successful pharmaceuticals require significant prior investment in research and development (R&D), yet competitors can cheaply copy them once they are on the market. The patent system restricts such free riding giving patentees a period of market exclusivity. It allows a reward for past investments and, more importantly, provides incentives for continued innovation.
Patents also have negative effects. They may increase prices – and so restrict supply – by more than the amount required to provide the necessary incentives to innovate. These negative features are important because they impact on human health. And though innovators seeking to patent must disclose considerable information about their inventions - thus providing a platform to others for further innovation - patents can also restrict further innovation by increasing legal risks and constraining competition in follow-on innovation.
Thus, the question of how much patent protection to offer is crucial. Pharmaceutical patent rights that run for too long or that are defined too expansively will deprive people of drugs because purchasers, including Governments, cannot afford them. They can also constrain follow on innovation: too weak a patent system means patients will suffer because the industry has inadequate incentives to develop new drugs.
(Source: Harris, T., Nicol, D., Gruen, N. 2013 Pharmaceutical Patents Review Report, Canberra.)
Given the scenario, it’s crucial that that when a pharmaceutical firm discovers a new drug, patent laws must give them a monopoly on the sale of that drug. However, since this can restrict the market availability of that medicine, the patent must not be too long. Once the patent runs out, the medicine can be made and sold by any other competing firms. At that time the market switches from monopolistic to being competitive. Given this structure of pharmaceuticals, answer the following two questions:
Question 1: Total 10 points
a) Explain how the innovating pharmaceutical firm gains monopoly under the patent laws.
b) How should the price be determined by the monopoly pharmaceutical during the life of the patent? Justify your answer with appropriate diagram/s.
c) Who are the winners and who are the losers under this market structure?
Question 2: Total 10 points
a) Explain why the generic pharmaceutical is competitive.
b) How should the price of the medicine be determined when the patent runs out? Justify your answer with appropriate diagram/s.
c) Who are the winners and who are the losers under this market structure?
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