Supply and Demand - Pharmaceutical Industry

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Supply and Demand – Pharmaceutical Industry
In today's society, a large percentage of the population requires prescription drugs to treat injury or illness. In some cases, the need for drugs may be short term and in other cases, the drugs may be required for the remainder of an individual's life. In all cases, prescription drugs are not free; the individual or his or her insurance company pays. The type of drug and available substitutions generally drive the costs. In this paper, I will summarize a study, "How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry" and relate the contents of this study to the economic theories described in the fifth edition of the book, Economics by David Colander . Summary of Article

"In 1984, the Drug Price Competition and Patent Term Restoration Act (also known as the Hatch-Waxman Act) created an abbreviated approval process for generic prescription drugs and at the same time extended patent terms for innovator drugs" (Cook, 1998). The Chairman of the Senate Committee of the Budget authorized an analysis of the impact generic drugs had on brand-name drugs as a result of this act. The study had two objectives – examine the extent to which competition has increased and how that competition has affected the returns from developing a drug (Cook, 1998). In the study, the author compares the economic impacts of two drug categories: the innovator drug and the generic drug. Break-through and brand-name are acronyms for an innovator drug. As long as the patent has not expired; an innovator drug cannot be duplicated in a generic fashion. However, an innovator drug faces competition from ‘me too' drugs because the ‘me too' drug uses the same functional mechanisms as an innovator drug but with a slightly different chemical combination. The generic drug is a low cost substitute for a brand-name drug (Cook, 1998). With the introduction of ‘me too' and generic drugs as...
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