Question

One of the key ways a firm may be a monopoly is through patent protection. Perhaps many of you heard of the infamous case of Martin Shkreli's price hike of a drug called Daraprim from $12.50 to $750 almost overnight (Links to an external site.). Specifically answer this prompt: Should there be a price ceiling placed on patented products? Why or why not? If so, how exactly would you set the price ceiling? Consider the incentives that such a policy may have in the short and long term.

Include a detailed and accurate application of one or more of the concepts: patent, legal barriers to entry, economic profit in the short run and long run.

Answer 1

This question of putting price controls on patented products has been specifically asked again and again in the case of the pharmaceutical company. This is because it has been observed that life savng drugs that are patented tend to be extremely high priced which are unaffordable by the general public. Hence, it is a rhetorical question as to whether these drugs should be placed under price control or not. However, this does not imply that all patented products should be placed under price control. Certain products that do not fall under the category of essential or life saving need not be patented, especially luxury goods. Hence, the answer to this question is - Only those patented products should be placed under price control that come under the category of "life-saving" or "essential", which more often than not will imply to pharmaceutical companies' products and drugs.

To set this ceiling price, the accurate cost of production has to be known first. Since this price ceiling will be set by the government, the companies will have a tendency to inflate their costs in the reports. To prevent this, porper inspection should be done. Once the accurate cost is established, the ceiling should be established such that it covers all of the cost an keeps a very marginal per unit profit for the company, just enough to incentivise it to continue producing the drug. This is essential because if the company does not find it profitable, it will not engage in peoduction of the drug. On the other hand, patenting is also necessary to encourage the companies to undrtake adequate R&D and develop new drugs that can be beneficial to the society.

Such a policy will enable both the sides - the company as well as the soceity - to benefit from the production of the new drug. In this case, the compnay can be given the right to patent their product for the long term (20 years or so) and reap the profit from the production of the drug that no other compnay can produce, and the price control will also enable the drug to be available for the society at a price that is affordable by everyone.