Question

Use the monopolistic competition model to analyze the potential effects of trade
(importing and exporting) on the pharmaceutical industry. (hint: highlight the tradeoffs).

Answer 1

Monopolistic competition model assumes one large firm with sizeable market share and other smaller firms with miniscule market share.

This structure helps keep prices competitive as the monopolist fears loss lf consumers and simultaneously the imports and exports are maximised in way to unlock economies of scale.

Here since products are not perfect substitute and heterogeneous it creates innovative products to doffernetiate and hence trade gets big boost as multiple deals take place and as results the market sees multiple products which keep prices similar and hence consumers are well off.

However such strategies also incurr highcost lf logistics and research and development in pharmaceutical industry which is tradeoff.

Firms here are price seekers and not price takers and each set of differentiation poses new prices for new drugs paving additional variety for consumers and thus higher probability to consumption. However rising marketing and advertising costs as well as development expenses ultimately lead to lower profits which is again tradeoff.