Health Sciences 3840B Lecture Notes - Lecture 13: Marginal Cost, Market Power, Price Discrimination
30 May 2018
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Market more concentration = increase in market power. A bunch of demand for a drug, lots of sales being made, demand distributed around diff firms. Market not
spread out evenly amongst all producers, concentrated around one or two producers.
Why would you have patents for pharmaceuticals but not some other things?
4 ways we can categorize goods
Pharmaceutical companies with R and D are producing knowledge and innovation, characteristics of a public good
Excludable = you can prevent other people from using it
Most private consumption goods
There is a clear way that this good is only for one person to use, assigned to one person
Other goods like a neighbourhood park –no gates or admission, not excludable, you can’t tell certain people that they can’t come into the park
Rivalrous = if it’s possible for more than one person to use it at once
Ex. Laptop, 2 people can’t use it
But knowledge –that knowledge that one of you having doesn’t preclude anybody else from having
If you come up with a new idea and need to put a lot of research into figuring it out –costs you something to produce it
If you can’t exclude people from using it, can’t charge people for it, can’t create a market for it
You can’t have any private benefit from this innovation – means that you may not create that knowledge in the first place if you can’t recoup your costs
If that is the nature of the good –nobody can justify putting time into making new innovative ideas –people won’t produce as much. Underproduced in a market
setting
Lots of knowledge you can access and you’re not being prevented from accessing
Even if you don’t buy a textbook and someone explains the concept to you from the textbook
Fixed costs –costs that have to be incurred even if you produce 0 units, R&D and testing
If you had free entry and competitive market, then whoever incurred those costs for R&D takes the hit. Prices driven down to marginal cost, OG manufacturer can only
recover the cost of producing each unit, the same as generic manufacturers
OG company won’t put the resources into R&D in the first place
2. Have a monopoly for some time, ensure that you have time to recoup your costs
Why do you need patents? Spur R&D in industries with high fixed costs
Increase competition = higher levels of innovation to a point, if too high price gets driven down to marginal costs and people won’t enter the market in the first place
More innovations come out when there is no patent protection, could sell their products in other countries that did have patent protection
Prices get driven down to marginal cost
What is the aspect of competition that is happening here?
Competing on their ability to have the market power
Firms have an incentive to try to extend market power if they have a monopoly
3. If you have a patented drug and it cost $100 a unit, you can’t increase that price the next year by more than inflation
Other ways you can put in regulations
What are the incentives of producers in a non-price regulated environment?
They want to introduce drugs into these countries
Price high there, price in Canada is going to depend on international comparisons –can get the initial price higher in the US and then make it high in Canada
Drug company is primarily promoting to physicians, not consumers
Detailing –pharm rep comes to doctor’s office to promote their brand
Opponents
If you don’t know, or lack information, if you don’t already have an idea that one will be better than the other, but there’s a commercial that’s promoting one of them,
you’re more susceptible to being misled
If it’s directed towards promoting products that are more profitable to the company, incentives of the company are not to increase welfare it’s to increase profit, and
these are not the same things
2007 study
- If the objective was to present a balanced perspective on the drug the benefits and risks should be presented at the same language level
Price discrimination
Demand curve: we all have WTP that is diff
PD allows producer to take advantage of that, if you could charge everyone a diff price you would charge them their WTP
PD is when you can charge diff prices to diff people
Ex. Student or senior discounts. Populations that have less ability to pay and you also want to capture their demand. Able to get business from people that otherwise
would not purchase
Brand name at a higher price and generic at a lower price
Lec 13 Pharmaceuticals
May 6, 2018
4:07 PM
Health Economics Page 1
