Question

When the patent expired on a drug named “Librium” (a sedative that was the forerunner of Valium), its price dropped from $15 to $1. Explain why this drop in price occurred. Relate your explanation to the problem of efficient incentives for creating and transmitting an idea

Answer 1

Patent is an exclusive right over the use of an idea to the Inventor. This entails that no one can use the idea without the consent of the Patent holder who may demand certain concession for the use of his idea. These patents are awarded for a certain period of time (say 20 years in USA). This awardes a monopoly to patent holder in use of this idea.

System of providing patents gives an efficient incentive for creating new ideas. This is because a lot of time, effort and money is taken for research and development of new drugs although the subsequent production of such drugs may cost very little. If the others are allowed to use the formula developed by a company at a huge cost, then the the company that developed the idea would not be able to even the cover the cost of its development (leave about making profits) because others will start selling the drug at a very low cost since they did not incurr the cost of its development.

Thus, companies that develop a new drug are awarded patent for a ceratin period on that drug so that they can sell that drug above its marginal cost of production to cover there cost Research and Development and also earn profit (for enagaging there resources in R&D).

Now, as per the question "When the patent expired on a drug named “Librium” (a sedative that was the forerunner of Valium), its price dropped from $15 to $1". This is because as I told, the marginal cost of producing the drug is very less, only the initial R&D cost is high. So, when the patent expired, other companies could also use the drug formula to manufacture and sell it, and since its marginal cost of production is very low and now companies will compete among each other to sell maximum quantity, thus reducing its price.

In short, after the patent of “Librium” expires monopoly market is converted into Competitive Market dropping the price from  from $15 to $1.