Critically analyse the article chosen with reference to economics theory and concepts. Although this article gives a possible explanation of price change affected by the other market’s price ceiling, the idea is based on theoretical analysis which could not be applied in the real situation. There are several assumptions made to support the idea of this article, however some of the assumptions are precisely impractical. 1. Applying monopolist scenario on ordinary circumstances As the article states, all economical approach in this article is for a monopolist who price-discriminates between two markets.
However, could this monopolist scenario represent the whole drug market? Pindyck and Rubinfeld (2009) mentioned that pure monopoly is rare. There are usually competitors who produce substitutions in most of modern markets and when there are substitutions available, many economic factors are differed from monopoly situation. Since this article is about drug market, it is possible to be monopolised for a certain medicine for a few years by the patent law, however it cannot generalise the result of monopolist scenario to all drug markets. 2. Independency of two markets This article assumes that the two markets are perfectly separated.
It states that neither leakage nor arbitrage occurs between the two markets, but it is excessively theoretical. In the modern capitalistic world, goods are transferred to any places where they are possibly sold at. Although the trade could be blocked by the law, there must be some leakage between the two markets as long as people can shift to each place. This article is about drug markets of U. S and South Africa where distantly locate from each, therefore the amount of leakage and arbitrage could be trivial to consider. However, the trivial variable could have a huge effect by changing people’s demand. 3. Total production cost
Most parts of theoretical explanation of this article are based on a function of a firm’s profit. It is given as total sum of revenues of each market minuses total cost. Profit = p1 X Q 1(p1) + p2 X Q 2(p2) – Cost function of (Q 1(p1) + Q 2(p2)) Pi: Price at market i. Q i(pi) : Quantity demand at market i Problem can be criticised here is the cost function. From the equation, the function calculates amount of money to produce two quantities of goods sold in the two markets by the same function. It means the firm uses the same production line to produce the good to sell in two markets and the marginal cost of the two costs are the same.
If the firm have factories equally away from each market and taxation, sales cost and currency rate are the same between two markets, it is possible. However, it is normally impossible to satisfy all the conditions. There are transport difference, wage difference, resource difference and more in different two markets. The function is differentiated in the article to show difference marginal cost cases. Therefore it states three possible categories as constant marginal cost, decreasing marginal cost and increasing marginal cost for the firm’s cost function.
Nonetheless, these three categories cannot explain different marginal cost cases in different market, for example, a case combined with a constant marginal cost in market 1 and an increasing marginal cost in market 2. Market1 marginal cost/Market2 marginal cost| Decreasing| Constant| Increasing| Decreasing| Analysed in the article| X| X| Constant| X| Analysed in the article| X| Increasing| X| X| Analysed in the article| Therefore, to make this cost function issue correctly, 6 more possible cases should be analysed. 4. Difference in type of goods
Drugs are special type of goods in the market which do not follow the law of demand. Because most drugs are needed to cure disease, price of drugs are not much mattered and demand of them depends on number of infection. If a drug is monopolised and it has to be prescribed to give to patients, the sales will be totally independent from prices. Therefore, many drugs are usually necessary goods and it can be even nearly perfectly inelastic. In this case, maximization profit model of a drug producing firm can be distinctly different from what the article suggests. 5. Change in Marginal cost
Marginal cost is the cost of the additional unit of a good and it does not keep incremental or decremented tendency. In usual case, marginal cost is decreasing from zero input and it increases after a certain point. In a short run production, it can be described by the law of diminishing marginal returns, and in a long run production, the law of return to scale can explain. Therefore, the assumption in the article to analyse each case of different marginal cost may not be applicable for some period of time.
Reference Pindyck, R. S. & Rubinfeld, D. L. (2009). Microeconomics (7th ed. ). United State: Pearson. 10, 349.