Sunday, June 15, 2014

Super-normal profits in medicine

In any industry the only way a company can make and continue to make super-normal profits is for the company to operate behind "walls" which create barriers to entry for firms who would wish to enter the market to compete.

These barriers to entry can include large start-up costs for any new entrant and also legal protection for products created by firms in the marketplace (patents or copyrights).

In the case of medicine, super-normal profits lie in the creation of new, patentable drugs which can be sold globally. Such drugs are legally protected from being copied by other firms for a period of up to 20 years. During this time the drug is free from competition from identical compounds but may compete with other drugs with similar prescribed uses.

Super-normal profits are also made possible in the drug industry because of the huge start-up costs for a new firm. The high cost of research, testing and marketing that goes into creating a new, successful drug makes entry into the market only possible for the largest conglomerates.

Similarly, super-normal profits are made possible for companies that pioneer procedures that can be patented to treat various ailments.

Other sources of super-normal profits are government limits placed on entrants into the various medical markets and by government subsidization of certain players in existing markets or in sub-sections of a market. These measures help to reduce competition and keep prices high in this sector.

Sharka Todd

No comments: