South-Western College Publishing - Economics  
Health Net-Works Take On New Meaning
Subject Assumptions and equilibrium
Topic Monopolistic Competition
Key Words On-line companies, industry
News Story

More than two hundred on-line companies now sell prescription drugs. While most are small companies, the big four drugstore chains (Walgreens, Eckerd Drug, CVS and Rite-Aid) are in the process of joining the internet-based drug industry. The system is that consumers email or call the pharmacist with the prescription information and the doctor's name. After verifying the prescription the pharmacy fills it and mails the drugs or leaves them for pickup at their store (if they have one). The web sites also provide health information and chat rooms related to various conditions. Some web sites have on-line physicians who will prescribe medications.

Consumers like on-line pharmacies because they are convenient and are less uncomfortable than retail stores. Also, the absence of a need to operate stores enables some companies to offer the drugs more cheaply. The danger is that the sites may be used to promote other drugs or make drugs more available, both of which could be dangerous without face-to-face physician input.

(Updated October 1, 1999)

1. The on-line drug prescription drug industry can be seen as monopolistically competitive. Consider the assumptions of monopolistic competition and explain why this is reasonable.
2. a)What might give a representative firm in the industry its brand loyalty? Refer to the news story.
  b)What would be the implication for the firm's demand curve?
3. a)Draw a diagram showing the demand and marginal revenue curves and the marginal and average total cost curves of a representative firm. Mark the equilibrium price and output.
  b)Show how having lower costs due to not having retail stores would enable the firm to sell drugs at a lower price.
4. Draw a further diagram of a representative firm. Explain and illustrate how on-line physicians might affect the equilibrium price and output.
Source Mark Albright, "Net dosage," St. Petersburg Times, July 5, 1999.

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