American Military University
November 22, 2009
Pharmaceutical companies are in constant pricing competition and innovative “idea wars” so to speak. Differential pricing, the specific price structuring and implementation, is the solution to resolving the conflict between pharmaceutical drug patents. There are always several different brands of drugs that can be prescribed or even bought over-the-counter, but the decision of the consumer or medical provider is usually dependent on the price of the drug being offered. Drug manufacturers must depend on differential pricing so that they can overcome competition by undermining the potentially higher prices that they offer the consumer.
Brand name price responses to market entry begins by assuming that the brand name producer is a dominant firm that incorporates price responses of generics to its own pricing decisions while the generic producers are fringe firms that take the brand name price as given (Frank & Salkever, 1992). Pharmaceutical medication is often viewed as being inappropriately over priced and often makes it necessary for lower income consumers to choose generic brands rather than the branded drugs. The larger pharmaceutical manufacturers spend massive amount of money in order to conduct research and development so that the drug will meet the standards set by the Food and Drug Administration (FDA). Once a drug patent is approved and hits the market, the competition can duplicate the drug for a lower price, therefore making the generic brands significantly cheaper than the originally patented brand.
A rational pricing strategy developed by a pharmaceutical company would depend on demand elasticity, which depends on many factors including income and availability of substitute products entering the market. The government is able to regulate the drug industry to a certain extent by bargaining on behalf of the consumers, making it possible to offer a...