ECON1020/1025: A “generic drug” Contains the Same Active Chemical Ingredient as a drug that was previously protected by a Patent: Prices and Markets Case Study, Rmit, Singapore

Assessment Task 3: Case Analyses
Answer any FOUR of the following questions. Each question is worth a total of 12.5 marks. If more than four questions are answered, marks will be awarded for the first four answers only.
QUESTION 1
A “generic drug” contains the same active chemical ingredient as a drug that was previously protected by a patent. Generic drugs are essentially the same and are sold by many different, small firms after the original patent has expired. A well-known example is an antibiotic penicillin. The COVID-19 pandemic has seen high use of penicillin by those infected by the virus. Using the demand-supply model, analyze this change in consumer preferences regarding this drug. Examine the likely consequences in one or two related markets of your choice.

QUESTION 2
Penicillin is ineffective against the coronavirus. In general, inappropriate use of penicillin, where it cannot alleviate symptoms or cure a disease, is contributing to antibiotic resistance, meaning bacteria are evolving to defeat the drug. This is endangering lives because of a rise in untreatable infections. Use the theories of market failure and government intervention to explain (i) why both patients and their prescribing physicians are failing to reduce the inappropriate consumption of penicillin, and (ii) what suitable government interventions may help this situation. Critically discuss potential problems with these interventions.
QUESTION 3
Another solution for antibiotic resistance is the development of new drugs that defeat resistant bacteria. Such research and development has a high fixed cost and can only be undertaken in industries with high market concentration where firms have significant monopoly power, like the pharmaceutical industry. Examine this industry using the theory and models of industry structure. Should the government be worried about any aspect of how an industry with this market structure will perform?
QUESTION 4
Pfizer is one of the world’s largest pharmaceutical companies. When developing a new drug this company needs to consider vertical integration. Using the theory of the optimal boundary of the firm, discuss Pfizer’s make-or-buy decision for developing and producing a new antibiotic drug. What stages of the vertical chain should Pfizer consider conducting in-house, and which should be outsourced? Provide reasons for your findings.
QUESTION 5
Pfizer and a competitor, Astra-Zeneca, are considering developing a new drug for a particular illness at the same time. The illness is relatively rare but the fixed cost of production is very high. In particular, the forecast demand for such a drug is insufficient to cover both firms’ costs. Analyze the interaction between the two firms using game theory. Present a payoff matrix to model the situation and analyze it for Nash equilibrium. What can either of these firms do to make their best, most preferred outcome more likely?