ECO204 Discussion 2 Week 4 Barriers to Entry

Class,

What purposes do barriers to entry created by the government serve?

            The government can create legal barriers to limit entry of new competitors into a market.  These serve in the form of patents which give certain companies or firms the protection from other companies making alternate or generic versions of the product or service that the primary company discovered (Amacher & Pate, 2019, Ch. 10.2).  This will allow the company to use its legal patent-guaranteed monopoly powers for 20 years, unless it is a design patent (14 years), after that time, the patent expires and all companies are allowed rights to the technology and can produce generic versions to create competition  and entry into that market.

What are other barriers to entry in the pharmaceutical industry?

            A pharmaceutical company could face different factors of natural barriers to entry into the market.  The seven-year requirement to officially gain a patent from the FDA is a barrier.  An example of this would be other economies of scale already thriving.  Until the company receives their FDA approval, they might not be able to afford to drop prices to meet the demand for what other larger companies are already doing until they get sole monopoly rights for their patent (Amacher & Pate, 2019, Ch. 10.2).

Should drug patents be extended to 20 years after FDA approval?

            To summarize, drug patents are good for 20 years, but can take up to seven years to get actual FDA approval.  This means the company only has 14 years of legal monopoly power instead of the full 20, so would it be fair to extend the patent time based on when it is approved?  I do not think the monopoly powers should be extended and will explain my reasoning in the following prompt.

Explain what would be the costs and benefits from this extension.

            The benefit would be the pharmaceutical company making a very large amount of money because they can price discriminate however they see fit with market research.  By price discriminate, I mean both contexts, as in they can differentiate prices between available markets of upper and lower class.  They can also price discriminate by raising prices as high as they can due to the extreme demand for the drug if nobody else can produce it yet (Amacher & Pate, 2019, Ch. 10.3).  That outcome would cost the consumer and insurance providers a lot of extra money that they might not have and would could hurt a lot of people.  The example that comes to mind is when a hedge fund got a patent for a certain medication and raised the price by some odd 700% and people could not afford medication that they needed to survive (until legal action was taken on this firm).

Resources

Amacher, R., & Pate, J. (2019). Microeconomics Principles and Policies. San Diego, California: Bridgepoint Education, Inc. Retrieved from https://content.ashford.edu