Question

1. A Pharmaceutical company has held a patent on an important cancer medication. After the patent expires, other firms can legally sell the same medication as a generic drug product. As the market analyst in the company, explain to the board of directors of the company the implications of the events for the company’s product.

Answer 1

As long as the product of the firm is protected by the patent in the market it is facing a monopoly market I.e. there are no competitors in the market and the price of the product is set at the point where the MR and the MC is equal, the firm in the market is maximizing its profit.

When the patent expires and new firms started producing those goods in the market the market will change to perfectly competitive market and the profit that the firm was making will fall significantly because new firms in the market will increase the supply of the goods and decrease the price of the product. This will make the demand curve horizontal and the firm cannot set its price on its own but it will become a price taker.