If there is one thing guaranteed to get Americans to stand to attention it is cheap Viagra. On June 2nd 2022, a firm owned by Mark Cuban, a billionaire investor, caused a stir by reducing the price of the blue pillwhose patent expired two years agofrom several dollars a pop to 11 cents. It was one of 87 drugs that the Mark Cuban Cost Plus Drug Company added to its growing assortment of cheap off-patent medicines. Drugs in America are notoriously dear. Mr Cuban is not the only one to have lost patience with America's current set-up. CivicaScript, from Lehi, Utah, is also trying to bring down the price of generics. In March it said it would manufacture a generic insulin at no more than $30 a vial, down from $300 for today's branded versions. At the innovative, patented end of the market, meanwhile, eqrx and Checkpoint Therapeutics are developing new cancer and immunology drugs with the explicit intention of undercutting expensive existing therapies from big pharma. Competing on price seems like an obvious thing to try in America's overpriced drug market. A lack of such competition suggests that obstacles get in the way. Certain off-patent drugs, such as insulin, take years to copy, manufacture, test and win regulatory. Having borne the expense of copying and certifying its insulin, CivicaScript may find that the incumbents, which have long since recouped their development costs, simply lower the price of their branded products to undercut it instead. Meanwhile, in the American market for patented medicines, the drug's inventor has a great deal of pricing power, which has driven prices higher. Developing new therapies is a costly gauntlet of research, clinical trials and regulatory hurdles. All too often it ends in failure. Nevertheless, to succeed in the long run, eqrx will need to make up with volume what it forgoes on margins. Britain's government has indicated that it would make large-scale purchases from eqrx's cancer drug pipeline if those gained regulatory approval. Though this will not help American patients in the near term, it is good news for the company if it helps scale up production.

Source: https://www.economist.com/business/2022/06/23/a-billionaire-wants-to-shake-upamericas-drugs-market

1. What are the sources of pharmaceutical companies' market power? What barriers to entry are there in the drug market?

2 Use a diagram of cost and revenue curves to explain why a profit-maximising monopoly tends to overprice its product.

3. Give your opinion on how to increase competition and consumer surplus in the drug market. (7 marks)