Question

1A) Explain how firms in the health care industry are trying to stifle competition and what the government is doing to prevent them from reaching their objective.

1B) Then explain the economic rationale behind the firms’ action and   the government intervention as well

Answer 1

1A.
Firms in the health care industry, make huge investments in the R&D work and get numerous patents upon the processes, formulations and new inventions. It makes them form monopoly in the market that causes smaller firms unable to compete with them and get driven out of the market. Further, firms keep pricing in a way that smaller firms cannot compete and they shutdown. Government is only regulating the prices and trying to ensure that it should not be predatory or it should not be violating anti-trust guidelines of the Sherman Act and Clayton Act. But, government is not doing anything to stop patent creation as it negatively affects the R&D Work. Here, the government also likes to ensure that new drugs, medicines and other inventions are available for people at affordable prices and for that, government can give certain subsidies for it.
1B.
Economic rationale behind firm’s action is to recover the investment made by them in R&D processes. For this, they have to incorporate the cost into price or make the product to be exclusively sold either directly by them or they get the royalty. The government intervention takes care that excessive regulation will discourage R&D and the responsibility will fall back to the government. So, government allows the patent and let firms recover the investments by either charging higher prices or selling license via patent rights.