Pfizer and the Economics of the Pharmaceutical Oligopoly

Introduction: Pfizer's Market Position

According to its official website, Pfizer Incorporated "discovers, develops, manufactures, and markets leading prescription medicines for humans and animals and many of the world's best-known consumer brands. Our innovative, value-added products improve the quality of life of people around the world and help them enjoy longer, healthier, and more productive lives. The company has three business segments: health care, animal health, and consumer health care. Our products are available in more than one hundred and fifty countries." (Official Website, 2004)

Although Pfizer's claims to offer value to its consumers may be debatable, its position as the industry leader in sheer dollar terms cannot be disputed. Of particular value to Pfizer as a publicly traded company has been its patent on the drug Viagra, and it continues to capitalize upon its dominance as an industry leader — even in the section of its website designed to attract prospective employees.

Inelastic Demand for Pharmaceutical Products

Demand for pharmaceuticals is relatively inelastic across the industry as a whole — not simply for Pfizer's drugs. Few consumers can say, "The economy is bad and my budget is tight, so I'll cut back on my insulin, beta blockers, or cholesterol-lowering drug this month." However, generic alternatives have posed potent competitive threats for the industry (EGA, 2004).

Furthermore, although Pfizer has the advantage of holding certain drugs — such as Viagra — whose brand names are virtually synonymous with their function, Viagra is not a life-preserving drug in the way that many prescription medications are. Its sexual enhancement function places it in a different category of necessity. Nevertheless, the potency of the Viagra name should not be underestimated. Much like Eli Lilly's relationship with the antidepressant Prozac before its patent expired, consumers recognize Viagra's function as synonymous with the brand rather than with any generic alternative.

Prozac, a potent antidepressant, was far more necessary to its core audience of psychologically affected users than Viagra, though Prozac was also described by some physicians as a "cosmetic" drug. The comparison illustrates that even within the category of relatively inelastic demand, the degree of necessity — and therefore the vulnerability to generic substitution — varies considerably among pharmaceutical products.

The Pharmaceutical Industry as an Oligopoly

In a traditional oligopoly market structure, only a few firms make up the industry as a whole (Investopedia, 2004). Those few firms exercise considerable control over the prices of the industry's products. The relatively wide range of products available within the pharmaceutical industry does complicate this economic characterization to some degree — there are meaningful differences in demand and drug effects across different drug types, though not all. For instance, Viagra may be a favored brand for its particular purpose, but the over-the-counter Pfizer drug Sudafed, a decongestant, faces far more competition and has a greater number of available substitutes.

Like a monopolistic market, an oligopolistic market often has high barriers to entry. The high cost of researching, developing, and patenting a new product alone means that a company faces enormous difficulty entering such a market structure. In oligopolistic markets, "the products are almost identical and thus the companies, competing for market share, are interdependent via market forces. If, for example, an economy needs only 100 widgets but Company X produces 50 and its competitor, Company Y, produces the other 50, the prices of the two brands will be interdependent upon one another and therefore similar. So, if Company X starts selling the widgets for a lesser price, it will get a greater market share and force Company Y to sell for a lesser price." (Investopedia, 2004)

Conclusion: Sources of Pfizer's Price-Setting Power

Name recognition for products like Viagra is one of the company's greatest strengths. Its competitors within the oligopoly are relatively few, and safety fears surrounding drug importation limit cost competitiveness from more economically aggressive operators such as generic drug brands or overseas importers.