Patents on Semaglutide Due to Expire Next Year

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

How would you classify the market for semaglutide?

The market for semaglutide is ___________.

a) a legal monopoly

b) a duopoly

c) a regulated monopoly

d) a contestable market

Wrong! - What is a duopoly? Wegovy and Ozempic are two products sold by the same firm, so the market should not be confused with a duopoly. Does the patent on a good makes it seller a regulated monopoly? Could the market for semaglutide, which has a patent acting as a barrier to entry, be considered contestable?

That's Right! - A legal monopoly is a market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright. As Novo Nordisk holds the patent on semaglutide, giving it the exclusive right to produce the good, the market for semaglutide is a legal monopoly.

Is the market for semaglutide likely to be efficient?

a) No, because it charges a price that exceeds marginal cost which leads to underproduction and creates a deadweight loss.

b) No, because it charges a price that exceeds marginal cost which leads to overproduction and creates a deadweight loss.

c) Yes, because it is a regulated monopoly.

d) No, because it charges a price below marginal cost which leads to overproduction and creates a deadweight loss.

Wrong! - With patent protection, will Novo Nordisk charge a price below marginal cost? When the price exceeds marginal cost, does the market overproduce or underproduce? Is a regulated monopoly always efficient? Is the market for semaglutide a regulated monopoly?

Well Done! - As an exclusive holder of the patent, Novo Nordisk sets output where MR=MC, which results in a price above marginal cost. The profit-maximizing quantity is less than the efficient quantity, and underproduction of semaglutide results in a deadweight loss. Some consumers who need the drug don’t get it.

How will the market for semaglutide change with the expiration of Novo Nordisk’s patent?

a) The market for semaglutide will cease to exist.

b) A higher quantity of semaglutide will be traded at a lower price and the market will become efficient.

c) A lower quantity of semaglutide will be traded at a higher price and the market will become inefficient.

d) Novo Nordisk will stop selling semaglutide but new firms will enter.

Wrong! - Why would Novo Nordisk stop selling semaglutide, or the market of semaglutide cease to exist once the patent it expires? A market becomes inefficient when a deadweight arises which decreases the total surplus to less than its maximum. Is that what happens when the patent expires?

Correct! - When the patent expires, more firms can enter and produce generic semaglutide. The supply will increase and price will fall. Each of the extra unit, which was a part of deadweight loss under monopoly, is now available at lower price. Consumer surplus increases and the deadweight loss eliminates.

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