There’s No Mystery Why Drug Prices Are So High

EconEye Admin

4 years ago

Rep. Katie Porter says lack of competition causes high drug prices. An example is insulin, which is patented and manufactured by three pharmaceutical firms. This is “why we see drug companies being able to engage in price gouging” Porter said.—yahoo.com

Answer the following questions to check your understanding of the story.

Describe the market for insulin.

The market for insulin is ______________.

a) a monopoly. Three firms produce the same drug

b) an oligopoly. A small number of firms charge very high prices

c) monopolistic competition. A small number of firms produce an identical drug

d) an oligopoly. A small number of firms, protected by a legal barrier to entry, compete

How many firms compete in an oligopoly, a monopoly, and a monopolistically competitive market? What are the characteristics of each market, and which market describes the market for insulin?

The market for insulin is an oligopoly. Ongoing improvements give the three manufacturers patents on the insulin they produce, which act as a barrier to entry into the market.

Are the three firms that produce insulin engaged in price gouging?

The three firms ______________.

a) aren’t price gouging. They are producing the profit-maximizing quantity and charging the highest price that consumers are willing to pay

b) are price gouging. They are making unnecessary improvements to insulin so they can raise the price

c) are price gouging because they are making a profit on a life-sustaining drug

d) aren’t price gouging. They are producing the efficient quantity and charging the highest price that consumers are willing to pay

The firms that produce insulin are maximizing profit. How do they determine the price to charge and the quantity to produce? Does a firm’s decision to maximize profit on sales of a life-sustaining drug like insulin mean that they are engaged in price gouging?

The three firms are maximizing profit by setting marginal revenue equal to marginal cost and charging the highest price that consumers are willing to pay. Maximizing profit is not price gouging.

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