Question

Prescription Drugs: Describe and discuss the structure of the pharmaceutical industry.

Answer 1

Ans) The market structure of pharmaceutical companies indentify more that of an oligopoly.

- In an oligopoly there a small number of large firms that dominate the industry but do not collude and have large barriers to entry.

- A distinguishing feature is that any one of these large firms has the ability to affect market shares and profitability. According to Craig (1994), this type of structure is often associated with product differentiation which leads to brand loyalty allowing firms to charge high prices and earn profits above what they normally would.

- Three types of barriers to entry can be identified for this industry. The most effective one is the government patent that gives the innovating firm a number of years to be the sole producer of a drug. This is necessary to allow these firms to recoup their initial investment.

- Furthermore, the first mover has the advantage of brand loyalty. Customers may be skeptical of a generic product unless effectively proven.

- Finally new competitors require access to the inputs needed for production of a particular drug. The original company may only release this information if it is profitable to them.

- Replication is costly so new entrants need to determine if it is worth it to enterthe industry (Morton, 2000).There are two forms of oligopoly. The first is pure oligopoly where products are standardized or homogenous.

- The second form is differentiated oligopoly which is the market structure found in the pharmaceutical industry. In this structure, products are heterogeneous; the drugs might be identical in purpose but they are differentiated from each other.

- By introducing specific designs, packaging and promotions, they build up brand loyalty (Henry & Haynes 1978). In turn, each product faces a downward sloping demand curve incorporating successful differentiation which leads to market power.