Principles of Economics- Mankiw (5th) 316

Principles of Economics- Mankiw (5th) 316 - 326 PA R T F I...

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326 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY CASE STUDY MONOPOLY DRUGS VERSUS GENERIC DRUGS According to our analysis, prices are determined quite differently in monopo- lized markets from the way they are in competitive markets. A natural place to test this theory is the market for pharmaceutical drugs because this market takes on both market structures. When a firm discovers a new drug, patent laws give the firm a monopoly on the sale of that drug. But eventually the firm’s patent runs out, and any company can make and sell the drug. At that time, the market switches from being monopolistic to being competitive. What should happen to the price of a drug when the patent runs out? Figure 15-6 shows the market for a typical drug. In this figure, the marginal cost of producing the drug is constant. (This is approximately true for many drugs.) During the life of the patent, the monopoly firm maximizes profit by produc-
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