Pharmaceutical Companies Critical Analysis (Essay Sample)

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Introduction
The market for pharmaceutical drugs is oligopolistic. According to Colander (2008), an oligopolistic market consists of few very large firms in an industry with barriers to entry. A firm in an oligopolistic market makes huge profits since it faces little competitive pressure. Though there are other equally large competing firms, they tend to act in collusion to lock in the high profits. Another source of power for these firms is drug patents that give them monopoly power in manufacture of drugs hence exorbitant pricing.
Pricing
Strategic behavior is very important for firms in this industry. This may take the form of cooperation, price leadership, or price or non-price competition. The firms choose a strategy that ensures maximum profits for all; price wars may lead to reduction in profit for all firms. A more profitable strategy would be price leadership (Krugman, 2009). A firm whose drug moves from patented to generic loses revenue since any manufacturer can now make and sell the drug. As a result, the drug becomes cheaper as different manufacturers try to appeal to the consumer. Nevertheless, for the duration of the patent, the company charges very high prices.
Patents and costs of manufacturing a drug
According to Herper (2012), the cost of coming up with a new drug can range between $ 4 billion and $11 billion. While a drug may cost just $ 200 million to develop, the failure rate may be as high as 15 times per a drug; escalating the cost significantly. This cost is the major barrier to entry into this industry. To recoup their costs, the firm patents the discovery and charges high prices over the life of the drug, which may be decades. Not every drug pays off and but the firm compensates by charging higher prices for those that do.
Garber, Jones, and Romer (2006) outline the major costs associated with manufacturing drug include the cost of raw materials; cheap chemicals and filler materials. Packaging is also important; depends on the price of the packaging material required. The other cost item is the factory manufacturing costs. This is the cost of producing the drug at the factory; the cost of labor, electricity, and administrative costs. Quality control costs are also significantly high in a tightly regulated industry as authorities are keen to ensure the drugs manufactured meet the highest standards. Yield loss is another cost component in the drug industry. Yield loss occurs in the production stage due to spillage and residue that sticks in the manufacturing equipment; this is usually between 5% and 10% of the drugs manufactured. Finally, the pharmaceutical company has to pay post-manufacture cost like taxes.
The above costs form only a fraction of the price of the drug. Monopoly power that companies have due to patents enables them to charge very high prices. The downside of this is that drugs are unaffordable to poor customers in the undeveloped world. Allowing the production of generic drugs would save millions of lives of people suffering from treatable diseases like Malaria, and Tuberculosis.
The ethical question of high price
Drug companies deal with a commodity that is essential to health of million and hence essential to their survival. However, this cannot justify charging high prices. Indeed, it should encourage the opposite behavior. The morality and ethics of charging high prices to people whose life depends on the consumption of that product are questionable. In the developing world, majority of the buyers are customers with meagre incomes. Pricing the drugs at monopoly prices puts them out of reach of such people and consequently leads to loss of life (Danzon, Nicholson, and Pereira, (2005).
Price insensitivity
According to DiMasi, Hansen, and Grabowski (2005), drugs are price-insensitive mainly because of the market topography of the drug market both on the supply and on the demand side. Buyers of drugs are mostly institutional individuals. This is especially true in the developed world where institutionalization of healthcare is the norm; through health insurance schemes. These healthcare companies have massive resources unlike individuals who might face financial constraints. The institutions have the capacity to pay even highly priced drugs. The drugs companies in this case have little incentive to keep prices low (Finkelstein, 2004).
Conclusion
Pharmaceutical companies are oligopolies and their pricing practices emphasize non-price competition. In addition to this, the demand side of the drug market also ensures that drugs are price-insensitive. As necessities, consumers must purchase the life-saving products...