Market Analysis of Atorvastatin: Monopoly and Generic Drugs, Slides of Managerial Economics

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MONOPOLY

CASE: ATORVASTATIN(降膽固醇藥)BY

PFIZER

 Pfizer markets atorvastatin under the brand name “Lipitor”.  In 2010, Lipitor was Pfizer’s best-selling drug.  Even while protected by patent, Lipitor faced competition from other statins- particularly simvastatin.  The US patent on simvastatin, owned by Merck, expired in 2006, and Merck cut the price of Zocor, its branded simvastatin.  Pfizer’s US patent on atorvastatin expired in June 2011.

MANAGERIAL ECONOMICS

QUESTIONS

 Pfizer must decide how to manage the competition.  How much should it spend on advertising?  At what scale should Pfizer produce the branded drug?  How would generic production of atorvastatin affect the market for the ingredients in the production of the drug?

MARKET

 Pure (Perfect) competition – least freedom in

pricing

 Monopolistic competition

 Medical clinic

 Oligopoly

 Hospital  anti-virus software, microcomputer operating system

 Monopoly – single supplier of good or a

service with no close substitute: most freedom

in pricing

SOURCES OF MARKET POWER

 unique resources  human  natural  intellectual property  patent  Copyright  economies of scale / scope  product differentiation  government regulation

• 50 50 70 130 150 250 0.4 0.8 1.2 1.4 1.6 2 demand (marginal benefit) marginal revenue Quantity (Million units a year)

MONOPOLY: MARGINAL REVENUE

AND PRICE

infra-marginal units

MONOPOLY: PROFIT MAXIMUM, I

Operate at scale where marginal revenue = marginal cost  Justification: If marginal revenue > marginal cost, sell more and increase profit. If marginal revenue < marginal cost, sell less and increase profit.

OPERATING SCALE:

PROFIT MAXIMUM

DEMAND CHANGE

Find new scale where marginal revenue = marginal cost  should change price  new scale and price depend on both new demand and costs

COST CHANGE

Find new scale where marginal revenue = marginal cost  change in MC --> should change price (but less than change in MC)  change in fixed cost --> should not change price or scale

ADVERTISING

 benefit of advertising -- increment in contribution margin  advertising elasticity = % increase in demand from 1% increase in advertising

ADVERTISING: PROFIT MAXIMUM

Profit-maximizing advertising/sales = incremental margin x advertising elasticity

• incremental margin = (price - MC)

COKE VS PEPSI, NOV. 1999

 Coke  raised prices by 7%  increased advertising and other marketing  Pepsi  raised price by 6.9%  what about advertising?

ANSWER

 Pepsi should increase advertising expenditure for two reasons:  price increase --> increase in incremental margin;  Pepsi’s increase in advertising will attract some marginal consumers -- those who are brand- switchers, relatively less loyal to Pepsi/Coke; so Coke’s demand will be more sensitive to advertising (higher advertising elasticity)