OLIGOPOLISTIC MARKETS
OligopolisticMarkets: Pharmaceutical Industry
Unit
An oligopoly is a market structure that lies between a perfectcompetitive market and a monopolistic market. It is characterized bya market dominated by a few number of suppliers or business entities,though there may be many other small players in the industry. The fewdominant players are assumed to be in competition with each other butthey also tend to cooperate with one another to lock out otherplayers and also benefit as a whole. They do so in order to increaseoutput, achieve efficiency, and also increase profits. In some cases,they may form cartels or alliances to cement their dominance in themarket. According to Hubbard, Garnett and Lewis (2012), these firmsemploy a number of strategies to create barriers to market entrywhich include economies of scale, technical superiority, mergers,advanced technologies, control of distribution lines and patents.There are several industries that can be termed as oligopolistic innature.
The global pharmaceutical industry is a perfect example of anoligopolistic market. It is characterized by numerous players in themarket but only a few of them dominate a significantly huge marketshare. In the US, there are about 11 firms that dominate thepharmaceutical industry though these are numerous small firms tryingto enter the market especially through generic drugs. Recently, theAmerican pharmaceutical industry has been on the spotlight with thedominant players accused of overpricing drugs courtesy of the firms’positions in the market. According to an article published by anautonomous nonprofit organization, the 11 largest players in the USindustry made $711 billion in profits in a decade mainly byovercharging seniors and disabled persons for drugs through themedicare program. As a result, per capita drug spending in the US is300% greater than in Denmark (Sullivan 2013). This is purelyattributable to American market dynamics.
Although there are many strategies at the disposal of firms increating an oligopolistic market, American firms employ strictcontrol of distribution networks and mergers and acquisitions tocreate an oligopoly in the pharmaceutical industry. Pfeffer (2016)writes that between 2006 and 2013, the price of drugs in the USincreased six fold. He attributes the hike to the creation of anoligopolistic market through mergers and acquisitions. Large firmmerge with large ones or large firms acquire smaller ones therebyreducing the total number of firms in the industry. The author notesthat in 2014, there was $250 billion worth of mergers in thepharmaceutical and biotech industry which increased to $300 billionin 2015. For instance, in that period, SmithKline Beechman wasacquired Glaxo Wellcome, Pfizer acquired Wyeth and Merck acquiredMerck. This clearly shows that the number of firms in the market isgrowing smaller giving them more oligopolistic advantages.
Furthermore, these firms patent their drugs and control distributionchannels to lock out generic manufacturers. Through intensiveinvestment in research, large firms are able to develop new drugs andpatent them for a period of years. Control of distribution is mostobvious where patents have expired. Expired patents mean that genericmanufacturers can use the same ingredients to develop similar drugs.However, as was the recent case involving Martin Shkreli and Turingpharmaceuticals, controlling distribution lines enable firms to avoidcompetition from generic drugs manufacturers and retain theiradvantage in the market. Accordingly, Turing managed to increase theprice of an anti-infection pill called daraprim by 5000% (Perrone,2016). Ordinarily, generic drug manufacturing firms, especially thosebased in India, would be capable of producing the drug at a lowerprice.
As such, it is clear that an oligopolistic market is not desirablefor consumers. However, for these firms, such a market structureoffers them an opportunity to dictate terms to buyers and make superprofits. Given the oligopolistic market in the pharmaceuticalindustry in the US and globally, consumers have suffered and thus isnot desirable for the greater good.
References
Hubbard, G.,Garnett, A. & Lewis, P. (2012). Essentials of Economics. NewYork: Pearson
Higher Education
Perrone, M. (2016).Drug distribution can block competition. Retrieved from,
<http://www.thebeaconnewspapers.com/select-stories/fitness-health/drug-distribution-can-block-competition>
Pfeffer, J. (2016).To Fix High Drug Prices, Stop the Merger Madness. Retrieved onlinefrom,
<http://fortune.com/2016/05/17/high-drug-prices-mergers-pharma-competition/>
Sullivan, J. (2013).Big Pharma made $711 bln overcharging seniors and disabled. Retrieved
from,<https://www.rt.com/usa/big-pharma-senior-disabled-576/>
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