Question

5-Monopoly pricing that results from patents can be a point of criticism. An example of this is life saving medications. What are the advantages and disadvantages of patent laws in this situation. What alternative strategy to monopoly pricing can you think of? What are the disadvantages of your alternative strategy?

Answer 1

There are patents provided to pharmaceutical forms that are producing life saving medications. Please patents provide exclusive right of production for at most 20 years so that the Pharmaceutical form getting the patent does not face competition and can continue to charge a higher price for a longer period of time.

An obvious advantage is to invest a large sum of money in research and development which can be recovered in later stages by charging a higher price and earning sufficient in high profit to recover the investment. Therefore patents are helpful in innovation of new medicinal drugs and encouraging firms to invest huge sum of money without being worried about the recovery of invested money.

On the flip side there is higher mark up over cost because the demand for a particular product with patent is generally inelastic that empowers the manufacturer to charge a sufficiently higher price. This is not good for consumers in general because price is increased, quantity is reduced and this reduces consumer surplus. There can be excessive wastage of market resources in terms of deadweight loss.

From the perspective of consumers the monopoly can be regulated to charge a price equal to its marginal cost or average cost of production. While average cost of production results in zero economic profit, marginal cost pricing brings economic losses which are discouraging for the monopolist. In marginal cost pricing there will be no investment made as the ability to recover this with later profits is highly compromised. Incentive to innovation is demolished and the monopoly may not sustain for long under this case.