Let’s assume that the pharmaceutical industry operates as if it were a monopoly

Question

Let’s assume that the pharmaceutical industry operates as if it were a monopoly or as a near monopoly. Furthermore, let’s assume that the federal government sets all prices. However, and as per the order of the federal government, the elderly and those on low incomes are offered discount cards to help offset the monopolistic prices set by the government.

So how does a monopolistic situation allow for the setting of different prices (via the discount process) when the government sets the price? Also (and to provide maximum value to the consumer), the companies that sell pharmaceuticals bundle items together for a price, even though not all items are wanted or desired by the consumer. The consumer cannot refuse the bundled items and they cannot sell the unused items back to the company or to other consumers (legally).

If the pharmaceutical companies can prevent resale, is it possible to increase the profit by bundling? Finally, how might the pharmaceutical companies charge prices during higher demand (assume no scarcity)? Please discuss all of this in detail and in terms of the pharmaceutical company’s situation in relation with the government.

Explanation / Answer

Monopoly is a situation in which there is only one producer and supplier of the product and due to which he holds a situation in the market in which he can set the prices as per their wish. In this situation pharma companies hold monopoly in the market but to prevent the harassment of the consumers the federal govt controls the prices by providing discount coupons to elderly and low income customers, in this way both the pharma companies and the consumers get maximum benefit as the companies earn maximum profits and also the consumers who cannot afford costly medicines get them at an affordable rate. Here the company is selling the products in bundle which at one end is benefiting the pharma companies but at the other end the consumers are getting exploited as they have to buy the bundle even if they are in need of a single product, also they are not allowed to return the unused products due to which they cannot get the worth for their money. Yes the pharma companies can increase their profits by prevent reselling as the medicine is the necessity and consumers have to buy them anyhow even if the same is not available without bundle, due to which the pharma companies increase their turnover and hence increase profits. During the period of higher demand, the pharma companies should ethically reduce prices as there is no scarcity of products and the company is already earning good profits and the higher demand will definitely give them higher profits. Hence in this situation the pharma company is enjoying monopoly and also the govt is controlling the prices by maintaning control over the prices.

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