Question

Short essay question:

Using your readings, including "Drug Goes From $13.50 a Tablet to $750, Overnight,”:

a. How would you describe the price elasticity of demand for Daraprim? What barrier to entry into the Daraprim market does Turing Pharm use to maintain its monopoly market position and keep other firms from entering into the Daraprim market?

b. For practically any other business that chooses to raise its price by 50 times, the business would surely lose most if not all of its customers. Why is Turing still in business? (Elasticity of demand for Daraprim and total revenue relationship is key here.)

c. Describe how the elasticity of Daraprim would change if there were generic versions of the drug offered by other companies and how would total revenue be affected accordingly?

Answer 1

(a). Price elasticity of demand means the degree of responsiveness of demand for a commodity with reference to change in the price of a commodity. In case of Daraprim the price elasticity of demand is below 1 as it is perfectly inelastic. The barriers in entry into Daraprim are: There are no close substitute available, the firm is a price maker and fixes its own price, the firm has complete control over raw material.

(b). Turing is still in business because there are other products in development i.e. TUR- 002 - this product is for treatment of suicidality. TRP-001 - this product is for glycogen storage disorders , TRP-002 - this product is for development disorder . etc. Now talking about the elasticity of demand for daraprim and total revenue relationship is P_{ed <}1 = TR increases i.e.when demand is inelastic a rise in price leads to the rise in the total revenue.

(c). With the price now High other companies could convincebly make generic copies since patent have long expired one factor that could describe the option is that Daraprim's distribution is now tightly controlled making it harder for generic companies to get the samples they need for testing. This will result in Highly elastic demand i.e when percentage change in the quantity demanded is more than the percentage change in price and demand for such a commodity said to be highly elastic. Total revenue will decrease and the demand is highly elastic.