Do pharmaceutical industries earn high profits

Within my literature reappraisal, I will discourse and measure the chief pieces of literature that I will utilize when composing my thesis. I have analysed the assorted pieces of work in the order of my proposed construction ( in subjects ) to guarantee a wide spectrum of reading and entire coverage of the chief points within my thesis. However, these are non the lone literatures that will be used, in the signifiers of intelligence articles, diaries, books and official publications.

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Barriers of entry/exit

The figure of replacements available for a certain merchandise can move as a barrier to entry. In the instance of the pharmaceutical industry, the relevant replacements to a trade name name are in the signifier of generic products/drugs. Whilst reexamining assorted literatures, it is apparent that there has been much argument over what consequence generic merchandises have on the fight of the pharmaceutical industry.

Frank and Salkever ( 1997 ) province that when generic merchandises enter the market against branded names, the monetary values of the branded names increase whilst the monetary values of the generic merchandises lessening. They created a theoretical account to warrant the consequences dwelling of two groups of consumers, a quality-conscious group which continues to purchase the branded merchandise even when generic merchandises enter the market, and a price-conscious group which buys from the generic merchandise ( Frank and Salkever, 1997 ) . Therefore, as generic merchandises enter the market, the demand for branded merchandises will diminish and go less elastic, therefore the addition in monetary value ( Frank and Salkever, 1997 ) . This thought is counteracted by Wiggins and Maness ( 2004 ) which illustrate that the entry of generic goods will increase competition within the industry and drive both generic and branded monetary values lower. Therefore Wiggins and Maness ( 2004 ) suggest that the market is less metameric with different types of consumers than what Frank and Salkever ( 1997 ) ab initio proposed. Wiggins and Maness ( 2004 ) conducted empirical grounds to demo that when the figure of Sellerss in the industry increased from 1 to between 6-15, the monetary values of branded merchandises reduced by about 83 % .This to a great extent contrasts to the consequences found by Frank and Salkever ( 1997 ) which conducts similar empirical analysis and shows that there was about a “ 50 % addition in the monetary value of branded merchandises around 5 old ages after generic entry ” ( Frank and Salkever, 1997, pp.83 ) , a “ 40 % -50 % displacement in market portion from brand-name merchandises to generic merchandises and a 25 % -30 % decrease in generic goods monetary values ” ( Frank and Salkever, 1997, pp.89 ) . This consolidates the fact that Frank and Salkever ( 1997 ) provide grounds which goes against traditional constructs of competition.

However, there are some restrictions associated with both literatures discussed. With respects to Frank and Salkever ( 1997 ) , the paper surveies a sample of 32 drugs whereas Wiggins and Maness ( 2004 ) acquires informations from a much wider spread of drugs ( anti-infectives ) therefore one could reason that Wiggins and Maness ‘ ( 2004 ) consequences are more believable based on the size of the sample they have used. Both the literatures are utilizing empirical analysis which is comparatively backdated and so the consequences are most likely inaccurate for today ‘s pharmaceutical industry. Frank and Salkever ( 1997 ) are utilizing drug informations from the period 1979-1987 and Wiggins and Maness ( 2004 ) used drug informations of anti-infectives from the period 1984-1990. Therefore, this needs to be considered and noted when composing the statement within my thesis.

Another signifier of a barrier to entry is the patent system that is highly important in the pharmaceutical industry. Lehman ( 2003 ) is a papers used to present the thought of a patent and to underscore the importance of publishing patents in order to promote invention within the pharmaceutical industry. The literature discusses how patents work otherwise in certain industries with the pharmaceutical industry being the most alone. Particular jobs that are applicable to the pharmaceutical industry include smaller periods of patent exclusivity due to the extended research and development and testing required before being sold on the market, and the easiness and low cost reproduction of patented merchandises. The literature besides discusses in-depth about how patents are indirectly lending to inequality by utilizing the undermentioned statement. Developing states lack commercial pharmaceutical industries due to the little sum of patents being issued from them. “ 95 % of all patent filings are subjects of OECD states ” ( Lehman, 2003, pp.9 ) . This so consequences into extra investing within the U.S. The U.S. have besides adopted a strong patent strategy and flexible monetary value systems ; adding to the attraction of the state. This has resulted in the “ US, EU and Japan accounting for 80 % of market portion whilst Africa, Asia, Latin America and the Middle East represent merely 20 % of the market combined ” ( Lehman, 2003, pp.12 ) . This peculiar paper besides argues that publishing a patent may promote generic merchandises being produced as the patent does non prohibit the development of a generic drug but merely the merchandising of the drug within the market. This point may be linked back to the conflicting statement presented sing replacements of a merchandise.

Although this paper discusses the patent system as a whole, including the forte within the pharmaceutical industry and the jobs environing the thought, it does non explicitly show how the patent will move as a barrier to entry for other houses. This is better explained within Possajennikov ( 2010 ) which focuses on the theoretical side of patents and how it can curtail the entry of other houses. The thought discussed is based upon patents alining societal benefits with societal costs and how a monopoly will be formed one time the patent has been issued as it instantly destroys all competition from the peculiar idea/product that is being protected. This ensures that the discoverer additions an attractive return for their merchandise. Therefore, when speaking approximately patents as a signifier of barrier, these two literatures being used in concurrence with each other will turn out to be good.

Do pharmaceutical industries earn high net incomes due to the maltreatment of market power?

My analysis on whether a high net income in the pharmaceutical industry is due to mistreating market power will come from a combination of informations analysis and assorted literatures. There are many conflicting positions sing the grounds behind such high net incomes, which are traveling to be highlighted. Roberts ( 1999 ) discovered that one time high net incomes have been attained, the persistent of net incomes could be due to either the anti-competitive account ( which most industrial economic experts adopt ) or the invention account. The latter is besides supported by Montgomery, 1995. ( Roberts, 1999 )

Using econometric analysis, Roberts ( 1999, pp.666 ) states the undermentioned consequences:

long-term net income falls from 0.4 to approximately 0.8 as the house moves from the upper to the lower terminal of the advanced leaning variable. Sing merely the high net income observations, the long tally rate falls from 0.73 to -0.22…

… However, the analysis provides really weak support for the anti-competition thesis as the coefficients on the low competition variables were undistinguished in both arrested development theoretical accounts ( 1999, pp.666 )

Therefore Roberts ( 1999 ) does non merely supply consequences back uping the thought that the higher the sum of invention, the more relentless the net incomes but besides finds that relentless net incomes in the pharmaceutical industry can be explained by high advanced leaning instead than the house avoiding competition.

The information within Roberts ( 1999 ) is based on the U.S pharmaceutical industry which poses a limitation as the consequences are non a contemplation of the U.K pharmaceutical industry. However, these consequences may be utile to analyze the industry as a whole instead than by part. The analysis besides focuses on one type of invention, merchandise invention ; therefore the term “ invention ” demands to be explicitly defined within my thesis to guarantee truth in analysis.

The consequences within Roberts ( 1999 ) are consistent to the theory presented by Mueller ( 1990 ) as he besides discusses that the ground behind long-run profitableness is due to changeless invention ( Roberts, 1999 ) . Schumpeter ( 1934 ) besides argues that invention creates a monopoly which generates high net incomes and these will make impersonators, accordingly driving net incomes back to its normal degree ( competitory market forces ) and this procedure so repeats i.e. there are relentless net incomes. Another position discovered is based on the efficiency hypothesis. Demsetz ( 1973 ) argues that if larger houses are gaining higher net incomes so it is due to non merely the industry construction but a combination of a farther two facets ; luck and they may be more competent in run intoing consumer demands than those gaining lower net incomes, i.e. they are more efficient in the manner that they operate. This obtains the same consequence as an industry with high concentration ; short term monopoly power.

These positions contrast to those that are adopted by general industrial economic experts that believe that competitory market forces should drive down net incomes to normal degrees ( Roberts, 1999 ) . Even though the above literatures discussed is available to make an statement against high net incomes being the consequence of mistreating market power, I will hold to associate it back to the empirical grounds of which I have acquired to guarantee that the statement is strong plenty and applicable to the pharmaceutical industry because it may be the instance that the information I have put together indicates maltreatment of market power i.e. doing the above statement weaker.

Does competition inhibit or make invention?

For my treatment around competition and invention within the pharmaceutical industry, one literature which discusses this statement in great item is by OECD Competition Commission ( 2006 ) . The papers discusses the two opposing theories that have been adopted about the relationship between competition and invention.

The Schumpeterian theory refers to the thought that dominant houses are more likely to introduce than those who have less market power as it is easier to retrieve costs and gain net incomes, whilst the antagonizing theory provinces that the more competition there is in the industry, the more likely it is for invention to happen due to the inducement to acquire in front of the game ( OECD Competition Commission, 2006 ) . The paper does non transport out new research and findings but alternatively, discusses consequences and decisions which have been discovered by other bookmans. The premise is that surveies discussed, about ever use the premise that concentration ratios or market portions are a contemplation of competition and R & A ; D strength or the figure of patents granted is a contemplation of invention ( OECD Competition Commission, 2006 ) .

The chief determination is that concentration and R & A ; D strength have a positive correlativity at low degrees of concentration with R & A ; D activity making a extremum ( at C4 of approximately 50 % -60 % and maximised at 52 % harmonizing to Levin et Al, 1985 ) with the relationship going negative at higher degrees of concentration ( OECD Competition Commission, 2006 ) . Mahmood and Lee ( 2004 ) warrant this relationship by reasoning that barriers to entry are the cause of the upside-down U-shape relationship.

Carlin et Al, ( 2004 ) explain the upside-down U-shape with a different attack by integrating an “ unexpected, external event which causes a alteration in the degree of competition in a given market ” ( OECD Competition Commission, 2006, pp.48 ) Therefore they examined house public presentation after the denationalization of state-owned endeavors in 24 states and their consequences stated that some competition is required in order to excite invention ( OECD Competition Commission, 2006 ) .

However, the chief restrictions involved with this literature are that it does non discourse alternate inducements to introduce such as the “ grade of technological chances present in the industry, regulative controls or new revenue enhancement Torahs ” ( OECD Competition Commission, 2006, pp.17 ) . However, the relationship does non keep when including technological chance as it reduces the significance that concentration variables have in the arrested development analysis ; reasoning that one time more factors are included, market power is non so important in act uponing degrees of invention. ( OECD Competition Commission, 2006 ) Therefore, more competition does non needfully make more invention when accounting for technological chance.

In decision, although the text is good for suggested theories and past empirical grounds on the relationship as a whole, it besides provides equivocal empirical consequences and does non discourse the relationship experienced in the pharmaceutical industry in peculiar and hence more research is required in order to happen a concrete decision via primary research.

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