Question

Background: There are 4-5 pharmaceutical companies (mainly from China, Germany, and the USA) that are researching a cure/vaccine for corona – hopefully, one of these companies will have a solution for the world shortly– in the meantime, some governments are proposing for alternative treatments medicine like CHLOROQUINE (originally used to treat Malaria)

One company finally succeeds in producing the vaccine. Describe or explain in detail the following situations. ( 15 points ) :

a) What is the new market structure this Pharma company belongs to now ? Why ?

b) List the 5 market structure characteristics for a Monopoly and explain the relation to the Corona vaccine .

c) How does Initial supply and demand look like for the new vaccine? (what about initial elasticity and price ?)

d) How happens in Long term for supply and demand if new pharmaceutical companies find a similar vaccine ? (what about long term elasticity and price under the same conditions ?)

e) Describe what happens to Economic profits in the initial phase and the long term

f) Explain how the creative destruction concept applies (from Chloroquine to Corona vaccine) . Are there any benefits to everyone from having a Monopoly?

Answer 1

a) If one company success in finding the vaccine for Coronavirus, then the market structure will be a monopoly. ‘MONO’ means single and ‘POLY’ means seller and thus a single seller.

Monopoly is a market situation where there is a single firm selling the commodity and there is no close substitute of the commodity sold by the monopolist. Since, no other company has found the vaccine for CORONA, the company selling vaccine practices monopoly.

B) Characteristics Of Monopoly—

1. SINGLE SELLER-

The first Main featuRE of monopoly is that there is only one seller of a commodity in the market with the reason that there is no distinction between the industry and the firm. The firm itself is the industry and have full control over the supply of the commodity. A monopolist is a price maker not a price taker.

In the context of corona vaccine, since ONLY one company has found the vaccine for CORONA, it’s a single seller in the market.

2. ABSENCE OF CLOSE SUBSTITUTES

In monopoly, the product sold by the monopolist has no close substitutes. Though some substitutes of the product may be available (CHLOROQUINE) yet they are not close substitutes. Thus , a monopolist doesn’t face any competition.

3. DIFFICULT ENTRY OF A NEW FIRM—

Monopoly arises due to ownership of strategic raw materials or exclusive knowledge of techniques of production or patent rights or government licensing. All these barriers which can be termed as economic, institutional or artificial, give birth to a monopoly. Due to this, the entry of new firms in monopoly maket structure is very difficult.

In the context of corona virus, since no other firm has found the vaccine, the entry of new firms is difficult. Also the product ,’vaccine’ is a highly technical product, other firms will be facing technological barriers along with other barriers to entry.

4. PRICE DISCRIMINATION—

Price descrimination refers to the practice of charging different price from different buyers at the same time for the same product. A monopolist can charge different prices for his product from different persons and in different market areas.

Min the context of vaccine, the monopolist might discriminate prices in different market areas. For example, he might charge a lower price in the home market and a higher in rest of the world.

5. PRICE MAKER WITH CONSTRAINT

Since , a monopoly firm is the only seller , it has substantial influence over the price of its product by manipulating its supply. But his influence over price is not total. Price is determined by forces of demand and supply and a monopolist can control only supply. Thus, a monopolist can charge any price but it can’t sell any quantity at that price. Hence , demand curve is a constraint.

In the context of corona vaccine, the above holds true. As the company might charge any price for the vaccine but the quantity that will be sold will depend on the demand curve.

C) Since corona virus disease has been declared a pandemic by WHO and where every country is intensively looking for a cure to the deadly virus, the demand for vaccine of corona is highly inelastic as its a necessity. Thus, the demand for corona vaccine is income inelastic . So we have a vertical demand curve at a particular level of quantity which implies that a monopolist can charge any price. Since , monopolist is a single seller, he doesn’t face any supply curve. In monopoly, there is no unique relationship between price and quantity supplied.

D) In the long run, when other firms will also find the vaccine for Corona, then the market structure will no longer be a monopoly. New firms will enter the market and will compete with each other and as a result market price may go down and the quantity supplied may increase.