America’s Prescription Drug Plan
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For the past couple of years there has been a bitter battle between Canada and the United States over the importation of prescription drugs. Unfortunately due to amount of uninsured Americans who cannot afford these drugs in the United States, they must travel across the border and buy them in Canada. Currently the United States has made it illegal for anyone but the manufacturer or a selected representative to import prescription drugs into the United States. However the increasing difference in price between prescriptions in Canada and the United States has created an opportunity for Canadian businessmen and women to export these ...view middle of the document...
If competitor could immediately copy a new drug the long and high cost development process would be less attractive. In order to encourage drug manufactures to have active R&D, prescription drugs are protected by patents (lasting anywhere from 10-14 years based on the contract). These patents create a monopoly for that drug and ultimately the one for the company that produces it.
The defining feature of a firm with monopoly power is that as they produce more, the price of the good falls. As long as revenue created from expansion exceeds the added cost of the good and/or service, provided the firm should continue to produce. Once marginal revenue equals
marginal cost the firm should stop expanding. For monopolists, marginal revenue is always below the price so that they stop expanding even though the price is above the marginal cost. Even though consumers are willing to pay the added cost of production the monopolist chooses to restrict output in order to maximize profit. During the contracted period of the patent the manufacturer is the sole provider of the product and can set the price controls (price ceiling or floor).
The preceding graph is the basic monopoly diagram. The red line is demand and the dashed line is marginal revenue. The black horizontal line is marginal cost. Perfect competition is when P = MC and the quantity where the red and black lines cross. The opportunity to raise profit by reducing output leads the monopolist to choose output where MR = MC and the quantity and profit are as shown.
Once a maximum price is set, then the firm can not increase prices by reducing output. MR = P, this can be seen from the formula: MR = P + P’Q because here, P’ = 0. It can also be seen from simple arithmetic. If the price is 5 no matter what the quantity then total revenue are 5, 10, 15 etc as Q rises from 1 to 3 and marginal revenue is 5 throughout. Note that because P= MR, that now MR>MC throughout. Every time we expand output, profit rises by the difference between P and MC. Therefore the firm expands as far as it can, as far as demand allows. The intersection of MR and demand now determines the Q produced. The main thing to notice is that the Q increased, even as the price fell because the ceiling took away the motive to reduce output. (Beckman, 2004)
One distinction that changes between markets is the regulating factor that controls what drugs may be sold and which ones may not. The United States and most industrialized nations have regulation standards designed to ensure the safety and efficiency of available drugs. However, these standards are not standard by any mean each nation has their own set of regulations. For example: “for prescription drugs to be distributed in the United States, they must meet the FDA’s particular safety and efficacy standard and also...