Government Mandated Monopolies,

By Alla Gul (MBA) – Our Contributor

Why are drug companies such as Pfizer allowed to establish and maintain monopolies (patents) on drugs – form of barrier?

Conventional wisdom might suggest that generally monopoly is bad for consumers because of the absence of competition.
A) What type of barrier is this?
B) Do you agree that drug companies should have this government mandated monopoly?  Why?

In economics, a monopoly (from Greek monos / μονος (alone or single) + polein / πωλειν (to sell)) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. (This is in contrast to a monopsony which relates to a single entity’s control over a market to purchase a good or service. And contrasted with oligopoly where a few entities have )[1][clarification needed] Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.[2] The verb “monopolize” refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition.

A) Monopoly is the situation in which there is a single seller of a product for which there are no close substitutes (Mankiw, 2004, p.314). A monopoly remains the only seller in the market because other firms can not enter the market and compete with a seller. It might happen due to the following reasons (“Monopoly: A Brief Introduction”, n.d.). First, a single firm owns a key resource.

Second, the government gives a single firm the exclusive right to produce some goods or services. Finally, the costs of production make a single producer more efficient than a large number of producers. As a result, all of the above create barriers to entry causing monopolies to arise. “The fundamental cause of monopoly is barriers to entry” (Mankiw, 2004, p.314). Regardless that government mandated monopolies have had some negative effects on the economy, the government grants the monopoly because doing so is viewed to be in public interests.
When a pharmaceutical company discovers a new drug, it can apply to the government for a patent. If the government approves the patent, the company has an exclusive right to manufacture and sell the drug for 20 years. The drug can not be copied due to protection of a patent (“Monopoly: A Brief Introduction”, n.d.). Many drug companies have been allowed to establish and maintain monopolies (patents) on drugs. These government mandated monopolies have created obstacles for other pharmaceutical companies to enter the market and compete. For example, Pfizer has patents on many drugs including Quinapril, Atorvastatin, and Sildenafil. Until these patents expire, no other company is allowed to produce the same drugs. This gives a company strong monopoly power allowing them to set higher prices and lower level of production than under competition that is considered to be harmful to the economy. However, monopolists argue that granting patents is in the public interest because it would allow them to spend more money on research and development in order to develop new and improved products. “It has long been recognized that government-granted monopolies (i.e., patents, copyrights, trademarks and franchises) can benefit society as a whole by providing financial incentives to inventors, artists, composers, writers, entrepreneurs and others to innovate and produce creative works” (“Monopoly: A Brief  Introduction”, n.d.). In fact, the importance of establishing monopolies of limited duration for this purpose is even mentioned in the Article I, Section 8 of the U.S. Constitution which states that “The Congress shall have Power . . . To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” (“Monopoly: A Brief Introduction”, n.d). Thus, “The government grants the monopoly because doing so is viewed to be in public interests” because “granting patents for discovered drugs encourages research and development” (Mankiw, 2004, p.316).

To summarize, the laws governing patent have benefits and costs. “The benefits of the patent and copyright laws are the increased incentive for creative activity. These benefits are offset, to some extent, by the costs of monopoly pricing” (Mankiw, 2004, p.316).

B) There are intensive discussions on whether drug companies should have this government mandated monopoly. Supporters of such monopolies argue that even if patent laws do impose costs in the form of higher prices and lower availability for consumers, under patent laws, more innovation will occur, which is beneficial  for society as a whole (“Patent Laws and the War on Good Drugs”, 2001). On the other hand, oppositionists state that the law encourages drug monopolies to create artificial scarcity of some drugs in order to have a higher price for their products (Boldrin & Levine  , Chapter 4). Next argument states that the law deprives the poor from affordable drugs and blocks rights of developing nations under TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights).

Despite the clear need for developing countries to exercise their rights to compulsory licensing and parallel imports to enable their people to have access to affordable medicines, a major and perhaps the most disturbing aspect of the crisis of patents and drugs is that obstacles have been and are being put in the way of developing countries seeking to make use of TRIPS provisions on compulsory licensing or parallel imports in order to buy or produce drugs at more affordable prices. (“Patents and monopoly prices”).

To continue, they argue that the high prices can not be justified by large expenses on Research and Development (R&D) since often most of the profits go to cover marketing expenses rather than R&D: “Pfizer says this pricing is necessary to fund new drug research, but 35 percent of its profits drain into marketing and only 15 percent support R&D, according to the Securities and Exchange Commission in 2002…”(“Gov’t should use power to make drugs affordable”). Oppositionists also state that due to the patent law, the pharmaceutical companies are getting less efficient.

In economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service

… Another major problem with pharmaceuticals today: The pharmaceutical companies are getting less efficient. They are increasingly turning out drugs that are less important to public health because they’re not as profitable. For example, roughly 70% of new FDA approved drugs are copycats or “me too” drugs which are small variations on existing drugs, usually done to reduce R&D costs and extend the patent life of an existing drug. (“Prescription Drugs”).

Finally, oppositionists conclude that “Patent protection is the most effective tool for drug manufacturers to keep out competition from generic producers and thus maintain monopoly control over the production, marketing and pricing of medicines” (“Patents and monopoly prices: Third Word Network” ). They state that “The net loss to society – from this policy is real and enormous” (Boldrin & Levine  Against Intellectual Monopoly, Chapter 4)

I incline to support those opposing the law. However, I also understand that the protection of intellectual property rights is important, and its violation “not only harms those innovators, such as the drug companies, who would be directly affected, it also does great damage to innovative activity, and indeed all types of capital (“Patent Laws and the War on Good Drugs”, 2001). I do not think I am ready to take one side or the other at this point since this is a complex issue and I do not want to jump to a conclusion ahead of time. I would like to investigate it more thoroughly.

References

Boldrin & Levine YEAR: Against Intellectual Monopoly, Chapter 4: The Evil of Intellectual

Monopoly Retrieved on October 21, 2007  from http://www.micheleboldrin.com/research/aim/anew04.pdf

Gov’t should use power to make drugs affordable

http://www.yaledailynews.com/articles/view/10127?badlink=1
October 17, 2007)

Mankiw,G.(2004). Principles of Economics. Mason, OH: Thomson South-Western

Monopoly: A Brief Introduction, Retrieved on October 20, 2007  from

http://www.linfo.org/monopoly.html

Morgan Rose , 2001, Patent Laws and the War on Good Drugs. Retrieved on October 21,            2007  from http://www.econlib.org/library/Columns/Teachers/patent.html.)

Novartis lawsuit threatens access to medicines for millions,  January 20 2007 Retrieved

on October 19, 2007  from http://www.oxfam.org.uk/applications/blogs/pressoffice/2007/01/novartis_lawsuit_threatens_acc.html)

Oxfam Press Release – 12 December 2006: India, Thailand and Philippines must face

down conflicts to guarantee affordable medicines Retrieved on October 21, 2007 from http://www.oxfam.org/en/news/pressreleases2006/pr061212_affordable_medicines6

Patents and monopoly prices: Third Word Network. Retreived on October 19, 2007 from http://www.twnside.org.sg/title/twr131b.htm

Pfizer, Novartis flayed for blocking new drugs to poor nations. Retreived on October 21,  2007  from http://www.dancewithshadows.com/pharma2/pfizer-novartis.asp

Prescription Drugs, April 2006. Retreived on October 20 from http://www.kucinichforcongress.com/issues/prescriptiondrugs.php April 2006

” Novartis lawsuit threatens access to medicines for millions”http://www.oxfam.org.uk/applications/blogs/pressoffice/2007/01/novartis_lawsuit_threatens_acc.html Jan 26 2007

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