INSTRUCTOR DISCUSSION NOTES:
At the Heart of the Matter

1. What are the economic reasons for issuing patents to firms, especially to drug companies?

To help them recoup R&D costs by allowing them to engage in monopoly pricing over a period of time before the market opens up to competition.

2. Is there a better way of helping firms undertake research and development costs without the use of patents?

Answers may vary; ask students to focus on the benefits/costs of subsidizing r&d..

3. In this example, are Sanofi-Aventis and Bristol Myers-Squibb better off reducing its price to compete with Apotex, or should those companies maintain their high price on Plavix? Why?

Depends on relative elasticity; if demand for prescription drugs is price elastic, then the firms need to lower price. If demand for the medication is price inelastic, then the patent-holders should keep its price high. This gets at the heart of the Canadians' actions: because Apotex acts as a substitute for Plavix, price elasticity of demand for Plavix must fall.

Multiple Choice/True False Questions

1. True/False. By being issued patents, drug companies considered to be natural monopolies.

ANS . False

2. Part of the reason drug companies want patents is because their
  1. Fixed and variable costs are both high.
  2. Fixed costs are high, but variable costs are low.
  3. Fixed costs are low, but variable costs are high.
  4. Fixed costs and variable costs are both high.
ANS . b

3. True/False. From the firm's perspective, and from the content of the article, the absence of a patent forces drug companies to a Nash equilibrium-type pricing solution: an equilibrium, but not an optimal one.

ANS . True

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