Microeconomic Assignment
4. 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
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