Monopolies of the Four Major

Monopolies

Of the four major market types -- monopoly, oligopoly, monopolistic competition and perfect competition, the latter is the most difficult to truly achieve. Almost as difficult, however, is the monopoly. Monopolies are defined by a certain set of criteria and are expected to behave in a certain way. This paper will analyze the concept of the monopoly in the context of a monopoly on anthrax prevention. The monopoly was granted to German drug maker Bayer, for its Cipro product. The issue of patent-enforced monopolies was raised during the 2001 anthrax scare. The monopoly issue can be examined because the U.S. And Canadian governments took different approaches to Bayer's monopoly on anthrax treatment.

Monopolies

The first characteristic is that there is only one firm in the industry. This firm is the single seller of a good for which there is not substitute (Investopedia, 2009). In the case of Cipro, in 2001 there were no competing treatments for anthrax. There were no reasonable substitutes, since the disease responds only to the one drug.

A monopoly should have high barriers to entry. True monopolies not only have no competition, they have little fear of ever facing competition. In Bayer's case, it held patent protection on Cipro. This provided Bayer with a monopoly on anthrax prevention in 2001. The monopoly is created by the patent protection. This is standard in the pharmaceutical industry, because the cost of developing new drugs is high. Pharmaceutical companies, being rational investors, will only develop drugs if they can recoup the cost of those drugs. Patent protection gives the drug companies the ability to turn a profit on their research and development of drugs by allowing them the opportunity to earn monopoly rents on the product.

As with all businesses, a monopolist will seek to maximize profit. The monopolist's ability to earn profits is determined by the total demand for the product and the price elasticity of demand. If a product is in high demand and that demand is price inelastic, then the company can raise prices to very high levels. For most products, however, there is some degree of price elasticity of demand (Mercer, 1996). This means that if the price increases too much, demand will fall. For every product, there will be a theoretical demand floor -- the minimum demand no matter what the price -- and a demand ceiling, the total demand if the good was free.

A monopoly, therefore, is only able to maximize profits if the price stays within the elastic range of the demand curve (AmosWeb, 2009).

The Cipro Market

Under normal circumstances, Cipro was a product with relatively low demand. Incidences of anthrax infection were low, and the drug's harsh side effects capped demand those with an immediate need to deal with an anthrax infection. Bayer was able to price Cipro at a high level, which allowed it to earn monopoly rents on the relatively slow-selling product.

In 2001, the anthrax letter crisis hit. The ensuing public panic represented a shock to the demand curve. Consumers worried about anthrax infection wanted to stockpile Cipro for use in case of an anthrax emergency. Not only was the demand for Cipro higher, but the price elasticity of demand was lower. Panicked individuals had no clear reason to purchase Cipro, but they felt it was important to save their lives and the lives of their families, to they wanted the drug, even at a high cost.

Conventional economic wisdom says that the combination of high demand and low price elasticity of demand is highly beneficial for a monopolist. Bayer should have increased its prices on Cipro in order to protect its shareholders' interests and make more money on the panic.

However, the firm was wary of being seen as profiting from a public health emergency. This illustrates a further disruption to the expected pattern of monopolist firm. This second externality resulted in the price staying lower. The Cipro market was out of equilibrium. It became difficult to find Cipro. Although Bayer insisted it could increase production to meet demand, some consumers bought Cipro in Mexico. The Canadian government temporarily suspended the patent and allowed a local manufacturer to produce a generic version of Cipro.

Both of these moves broke the monopoly. The Canadian government broke Bayer's monopoly and the second company moved into the market, creating a temporary oligopoly. The influx of Cipro from Mexico represented a substitute product, thereby breaking Cipro's American monopoly. This lowered the price of the drug until demand subsided -- note that it was demand that subsided and not supply. This despite the fact that the monopoly-granting patent protection was affirmed in U.S. courts (Bayer, 2002).

Eventually, the market for Cipro returned to equilibrium once the crises was over. By seeing how the market changed when introduced to different stimuli, we can better understand the characteristics of this market.

The market for Cipro -- and in general all patent-protected medicines -- began as a monopoly in equilibrium. Bayer enjoyed substantial pricing power and demand stayed at or near the demand floor as a result. When demand began to price, a shortage of the good occurred and the price when up. With higher demand, new market entrants emerged. This had unusual impacts, but they included what would be expected if a monopoly ended -- price dropped and supply increased.

When the Canadian government restored Bayer's patent- by court order - it restored the monopoly for Cipro (Spurgeon, 2001). This brought the Canadian market for the drug back into equilibrium. When demand started to falter in the U.S., so did the prices. The new entrant (Mexican Cipro) went off the market. Supplies decreased until the market was restored to its full equilibrium. Demand is normal, supply is normal and prices are normal as well.

If we checklist the Cipro market in equilibrium against what a monopoly market should look like, we can see that the market for anthrax treatment is a monopoly market. There is only one firm in the industry -- Bayer. We saw that in the two instances where the monopoly was broken, one utilized Bayer product from Mexico, the other from a Canadian company.

There must be high barriers to entry. In this case, both breaks in the monopoly were ultimately settled. The Canada situation was the most telling -- the federal government was ordered to restore the patent by the courts. That is powerful defense against outsider incursions into the industry. In the U.S., patent protection was upheld, giving some barriers to entry. They were only breached by a small loophole and even then only when demand rose far above supply. Once demand and supply fell back into equilibrium, the monopoly was restored, again a demonstration of the barriers to entry in this market.