If, for example, an economy needs only 100 widgets but Company X produces 50 and its competitor, Company Y, produces the other 50, the prices of the two brands will be interdependent upon one another and therefore similar. So, if Company X starts selling the widgets" for a lesser price, it will get a greater market share and force Company Y" to sell for a lesser price." (Investopedia, 2004)
How they compete against the other few competitors? Prices?
Only a few pharmaceutical giants, such as Pfizer and Eli Lilly, have the economic resources to do the necessary research to create new drugs, as well as the ability to commend the necessary salaries for researchers and government grants to do so. Consumers are also often unwilling to deviate from their favored brands of drugs, because of health concerns, real or imagined. Although economists assume there are a number of different buyers and sellers in the marketplace, meaning "that we have competition in the market, allowing for changes in price with changes in demand and supply, and that "furthermore, for almost every product, there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead," substitutes are not always available for drugs, when drugs are patented, and consumer's health care plans do not always provide for all drugs. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent over Viagra. (Investopedia, 2004)
In a market with many buyers and sellers, both the consumer and supplier have equal ability to influence price. But the prices of drugs have remained relatively inflexible, despite the presence of some generics. First of all, in the industry, in some cases "there are no substitutes and there is no competition. In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility, and has have very little influence over price." (Investopedia, 2004) Also, there are fears about drug safety, fanned to a certain extent by industry giants such as Pfizer as well as its primary competitor Eli Lilly. "The Food and Drug Administration, Drug Enforcement Administration and Customs Service all agree that lowering importation standards is a dangerous idea. And Health and Human Services says it will not result in significant savings for consumers. While the U.S. is fortunate to have a pharmaceutical distribution system that is generally considered to be among the safest in the world, incidents of counterfeiting nevertheless have increased fourfold over the past several years. It's a growing problem in need of creative solutions." (Official Website, 20040
Thus, Pfizer is part of the classic oligopoly structure where, "other firms cannot enter the market because either the startup costs are too high" and "the cost structure of the market gives an advantage to the largest firm. Most public utilities would fall into this category," however, the pharmaceutical market is subject to far less recognition.
How many competitors?
Name recognition for products like Viagra is one of the company's greatest strengths. Its competitors within the oligopoly are relatively few, and safety fears limit cost competitiveness between more potent economically competitive operators such as generic drug brands or importers from overseas.
How do they calculate their costs against competitors?
Generic medicines are themselves more economically priced than originator products selling at 20-80% less than original prices; (EGA, 2004) Thus name recognition is a factor, the R&D costs of developing the drug, how soon its patent is pending termination by the FDA, demand for the drug, and consumer need for the drug.
Analyze their prices
Drug prices have traditionally differed substantially, "reflecting differences in regulation, insurance coverage, medical practice, exchange rates, and other factors. Meaningful comparison of drug prices in different countries is technically problematic, because of vast differences in the range of drugs, forms, strengths and pack sizes available in different countries." (Danizon, 2002)
Do they have an efficient amount of resources?
Some would contend that the industry has, if anything, too many resources, not simply economically, but also in congress. The pharmaceutical industry is more research intensive than any other industry. R&D is roughly 14-17% of current sales. But R&D accounts for about 30% of total costs, if all costs are discounted to present value at the…
