Monopolies are abundant in the capitalist society that we live in but very few can compare to pharmaceutical monopolies. Looking at the US, lifesaving medication such as insulin and epi pens retail on average for $300 and $690 respectively. Why are the prices so high? The presence of monopolies means competition is stifled so consumers find themselves with little substitutes. Considering the inelastic nature of life-saving medication, and healthcare in general, consumers have no choice but to purchase drugs even at highly inflated prices.
Why have pharmaceutical been allowed to continuously inflate prices?
Once upon a time drugs used to cost a fraction of their current price but in the last decade drug prices have increased exponentially by 20% year on year. The process of releasing a drug is that which is time consuming, and economically straining. In order for a drug to be approved there must be multiple clinical trials, including an initial trial and then further trials on animals and humans. Not only are the trials themselves expensive however the research and development following each trial can cost billions. Even after dispending this much on developing a drug, 90% are likely to fail. Pharmaceutical companies therefore argue that in order to make a profit while considering R&D costs and the costs of failure are what result in the excessively high price of drugs.
How are monopolies created in the pharmaceutical industry?
When a new drug is released on the market, the company that developed it holds a patent on that drug. Until the period of the patent ends, typically twenty years, the company has exclusive rights over the manufacturing and distribution of that drug. With no competition, prices can be hiked up as much as possible due to the inelastic demand for drugs. So why are pharmaceuticals permitted a twenty-year patent? This is due to the costs of production previously mentioned; these patents guarantee that a profit is seen. The costs of drug production also discourages new companies entering the market. High barriers result in less competition resulting in a lack of pressure for pharmaceuticals to adjust prices or make drugs more accessible.
Another economic theory that plays a factor in creating monopolies is regulatory capture. Regulatory capture is when authorities that are tasked with regulating certain markets end up making decision favourable to the companies they are monitoring, rather than benefitting public interest. This arises for multiple reasons although it is mainly a result of the lobbying power of these companies. While both regular citizens and companies attempt to lobby regulators, companies have a much higher vested interest. In addition, companies have much greater means to lobby; they devote large budgets to influencing regulators. Of course, citizens can’t campaign at the same level, as individuals have a very limited number of resources. An example of regulatory capture is creating even higher barriers to entering the market. As previously mentioned, the costs to enter the pharmaceutical market is high however regulatory capture can lead to costs being even higher than they originally were. Ways of barring entry into this industry include requiring extensive research and testing of the drug, or needing to obtain expensive certifications, which are often unaffordable to smaller start ups and businesses. The manufacturing of epi-pens is speculated to be linked to regulatory capture. Despite not having a patent, epi-pens were priced exorbitantly due to the virtual monopoly the company had. This virtual monopoly is thought to have arisen from the close relationship between the company and the regulators.
Profits and Innovation
Despite the argument of charging high prices due to costs of R&D, recent research shows that 85 percent of companies spend more money on marketing their drug than developing it. Previously taking high risks was the standard for drug companies as they aimed to discover and distribute life changing medication. Nowadays ,however, we have seen less breakthroughs in this industry and more development of drugs that pose a low risk to the manufacturing company, resulting in a lucrative business model that maximises profits and minimises costs. A lack of innovation poses a threat to the future of healthcare and the progress we make in the pharmaceutical industry.
What can we do to minimise monopolies?
In order to reduce monopolies within the pharmaceutical industry it is crucial to reform the way that patents are distributed; this include the length of time for which they are available. Shorter patents result in generic versions of drugs being more accessible . Moreover, by incentivising the production of generic drugs, the number of substitutes on the market increases, resulting in increased competition within the industry, forcing companies to decrease their prices. Additionally, maximum prices and subsidies can also be utilised to aid in keeping prices accessible.
With the progress of AI and technological advancements, research and development is becoming increasingly less expensive due to less resources being used and causes a significant decrease in the time taken to run trials on drugs. For example, modern machinery and robotic automation allow multiple variances of a drug to be tested at the same time. This is especially beneficial in the race for the production of a new drug regarding life-threatening illnesses.
Monopolies within pharmaceuticals tend to be a product of regulations and rules in the industry. While arguably an individual does not have much influence to change these regulations, being less sceptical can result in a decrease in monopolies. Due to various factors, including asymmetric information, people are reluctant to try new drugs. They are unaware of the benefits as well as the harms of the drug. This means even if there is an increase in substitutes, this won’t necessarily decrease the power of monopolies.
While monopolies create many issues, such as inequality, exorbitant prices, it is difficult to say whether fully getting rid of them is a good idea.
Sanuya J
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