Good Essay About The Pay-For-Delay Strategy

A monopoly is a market situation where there is only one seller but a number of buyers. The seller is the price maker. The monopolist enjoys absolute market power by virtue of which she can earn supernormal profit. The monopoly power depends, to a large extent, on the possible threats to competition. If the monopolist finds potential threat in terms of entry of competitive firms, the monopolist tries to take effective strategies to keep competitors at bay. The market power of the monopolist depends on how effective the entry barriers are. It is because of the entry barriers that he monopolist remains a monopolist. The barriers can arise because of several reasons. The production technology and the market size may be such that it can support only one seller. If a competitor enters in such situations, the competitor faces higher production cost and so he is unable to capture the market. The competitor cannot immediately expand operation and enjoy economies of scale as the market size won’t allow that. This is a situation of a natural monopoly. Sometimes the monopolist may have access to strategic inputs required for the production of the good and hence enjoy monopoly power in the market for the good. In many cases a tariff barrier makes a seller a monopolist in the domestic market though the international market may be competitive in nature.
New innovations also tend to create monopoly power. In this case, patent rights, copy rights etc. tend to produce monopoly power for the period the patent right and copy right agreements hold. When a firm brings in a new product through research and development activities, the firm obtains a patent right so that it is the only producer and seller of the new product. The period for which the patent agreement exists, the firm enjoys a monopoly power as the patent right does not allow any other firm to produce and market the patented product. The monopoly power is enjoyed for a limited period. As the patent period runs out other firms can now enter the market. The monopolist faces competition now. The firm no longer enjoys monopoly power. The profit is reduced to normal level. The monopolist is no longer the price maker. The price level falls. The consumers enjoy a competitive price level for the product. In this article we are going to discuss a real life situation on how such patents provide monopoly power to firms and how the firms try to retain this monopoly power by applying an interesting strategy that has raised a lot of questions about its legality and social and economic consequences.
The pay-for-delay actions were taken by drug companies that have taken patents for some medicines. As the patent period nears expiry, the drug company faces threat to entry by generic drug companies. This tends to reduce the price of the drug to a large extent and the branded company’s profit is drained out. To avoid such situations, the drug companies that have patented their products enter into contract with the potential competitors. The companies with the branded product offer to pay a part of their profits from monopolization to the potential entrants, that is, the generic drug producers, to keep them away from the market. This is the pay-for-delay tactics used by the drug companies to enjoy the benefits of patent rights even after the expiry of such rights. Both the monopolist and the potential entrants are benefited as they share the profit from monopolization of the market. The consumers lose as they cannot enjoy a lower, competitive price for the product.
The pay-for delay strategy is counte- competitive. Such moves should not be allowed. In the past also there are examples where counter-competitive moves have been legally banned. In an oligopolistic market, cartels are not allowed as that leads to monopolization. In the case of pay-for-delay, the producers tend to retain monopoly power even after the lapse of the patent agreement. By economic principles, a monopoly market provides lower welfare than a competitive market. With higher prices existing in the monopoly market, consumer’s surplus is lost. A competitive market also ensures greater efficiency in production. For the benefit of the society at large, monopolization should not be allowed. Hence, the pay-for-delay strategy should not be allowed and legal action should be taken against this strategy.