AQA A LEVEL ECONOMICS PAPER 1

Extract C (lines 1-3) states: 'The market for most generic drugs is oligopolistic, with just two or three manufacturers making each product. This enables significant economies of scale within firms, but also presents the risk of consumer interests being harmed.'

QUESTION:

(answer the question using the mark scheme below)

Using the extracts and your knowledge of economics, assess the view that the market structure of the pharmaceutical industry is damaging for consumers.

[25 marks]

Areas for discussion include:

explanation of pharmaceutical market structure

discussion of consumer interests in this market: low and stable prices, safe and effective

products, access to drugs (these are merit goods)

discussion of the role the NHS plays in acting as a monopsonistic buyer of pharmaceuticals in the

UK, whereas in the USA and elsewhere, there are many more buyers

the oligopolistic nature of the generics market, with a small number of firms typically producing

each drug, and the opportunity for collusion and price-fixing, especially as there is little or no

branding of products

the fact that monopoly power is legally granted to firms in order to encourage research and

development into new drugs. The advantage of this is that new drugs are invented. The

disadvantage is that it can take 20 years for lifesaving drugs to become more affordable

the ability of pharmaceutical firms to exploit monopoly power and inelastic demand by massively

increasing prices

the importance of economies of scale

the importance of dynamic efficiency and links to market structure

the significance of productive and allocative efficiency

in generic pharmaceutical markets, oligopoly power can lead to tacit or collusive price-setting

very high levels of investment in research and development for new drugs and treatments,

contributing to rising life expectancy and improved survival rates, for example cancer and

HIV/AIDS

discussion of possible policies at the national level which may impact on consumer interests, eg

regulation by the CMA

market failure arguments

government failure arguments.

The use of relevant diagrams to support the analysis should be taken into account when assessing the quality of the student's response to the question.

Use the level mark scheme on page 4 to award students marks for this question. MAXIMUM FOR QUESTION 04: 25 MARKS