Demand is dependent on the frequency of a condition in the population. This number, for most conditions, is generally known. Thus, the equilibrium point can be determined that would deliver the cost recovery and markup pharma companies seek, without allowing costs to escalate to gouging levels. The problem is that once the monopoly has been granted there are no serious cost controls beyond market controls. There are two problems with this. The first is that without cost controls, it is difficult to improve bargaining power. First, buyers have little bargaining power because most buyers -- even insurance companies -- lack size to bargain over prices. Only Medicare and Medicaid have the size to drive prices down, because pharma companies are dependent on their money even with the monopoly. The second is that there is information asymmetry, which reduces the bargaining power of buyers. Again, only the largest and most sophisticated buyers will have any chance of determining the "right" price to pay for a drug, and everyone else will essentially be price-takers. For conditions where there are few if any substitutes, almost every buyer will be a price-taker. Thus, the conditions are ripe for abuse of monopoly power.

Where abuse of monopoly power exists, not only are economic outcomes negative but so are the social outcomes. Consumers can be priced out of life-saving treatments. This is the case in the private market, where insurance companies might balk, but also in public markets. Even governments might balk at high-priced pharmaceuticals where some sort of substitute exists.

Worse, the pharma industry has recognized the value of monopoly to its bottom line and sought to extend it. Drugs see new applications to the FDA for new uses, to attempt to extend the useful (monopoly) life of a drug. Some companies are now trying to patent human genes, even. The gene

BRCA is linked to very high rates of breast cancer, but...

Thus, while the entire human genome can be sequenced for $1,000, they charge $3,000 to screen for this one gene, and no other company can do anything with the gene. The case is actually before the Supreme Court to decide of a company can actually patent a gene that exists in nature (Carmon, 2013).
Conclusion

The monopoly system represents a distortion of economic equilibrium, which would otherwise balance the needs of suppliers and the needs of buyers in the economy. This distortion is well-meaning, but it also creates a situation where inflated costs are passed on to consumers. The monopoly encourages more drug development, but ultimately creating drugs is only useful when people can actually use them. Price controls would limit the ability of pharmaceutical companies to abuse their monopoly powers. No other industry is allowed to have a monopoly, much less abuse it, but for some reason pharma gets a free pass and everybody wonders why health care costs in the U.S. are sky high. The truth is that where monopolies exist but with price controls -- Canada, the UK, Europe, Japan -- pharmaceutical companies still make money. Further, people do not choose to be consumers of life-saving drugs -- I think most people would rather be healthy if given the choice -- means that there is a gross mismatch in economic terms between demand and supply, and this drives up costs and reduces social outcomes.