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.

A yes/no/maybe answer to the question with an explanation of your reasoning.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

There should be a price ceiling on the patented products. This is because in a monopolistic market, the sellers have got all the rights on charging the price as they are the only seller in the market. They can charge price recklessly and put the consumers at loss. In order to avoid such condition, there should be a price ceiling on the patented products so that the sellers cannot take the undue advantage of the customers.

The price ceiling should be put keeping in mind the sellers should be able to generate enough profits and the revenue as well as the buyers are also not being put at loss. There should be a win-win situation where the sellers should be able to generate enough profits and the buyers should also not be cheated.

Price ceiling on the patented products would discourage the other players to enter in the market and thus putting a legal barrier for the entry of the other players. This would be helpful in the long run. In the short run, the customer's interests are being protected and thus the customers would keep buying the product and seller's revenue generation can be achieved.