The Impact of Patent Protection on Firm Theory and Market Structure

This essay examines the influence of patent protection on firm behavior and market structure, specifically focusing on the pharmaceutical industry. It analyzes how patent protection grants a manufacturer monopoly power, enabling them to charge high prices and earn supernormal profits. The essay further investigates the impact of patent expiration, leading to the entry of generic drug manufacturers, increased competition, and a gradual reduction in prices until firms reach a normal profit level. The analysis highlights the transition from a monopoly market to a more competitive landscape following patent expiration, demonstrating the dynamic relationship between patent protection, firm profitability, and market equilibrium. Desklib provides access to this essay along with a wealth of study resources, including past papers and solved assignments.

Running head: THEORY OF FIRM AND MARKET
Theory of Firm and Market
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1THEORY OF FIRM AND MARKET
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................2
Reference.........................................................................................................................................4

2THEORY OF FIRM AND MARKET
Answer 1
Patent is a kind of protection that is provided to the manufacturers of new goods such that
no other firms can replicate it and make substitute product of the newly manufactured product. It
means that with patent protection for a new pharmaceutical product the concerned manufacturer
can restrict other manufacturers from copying or replicating the product. In this way, the original
manufacturer becomes the only supplier of the particular pharmaceutical product. The
manufacturer gets this advantage for the period after approval of the patent and prior to its
expiration. Hence, no other company can enter due to presence of the patent. During this period,
the manufacturing company enjoys monopoly power over the market (Ghidini, 2018). The
buyers do not have any other option to buy the pharmaceutical product. The demand for the
product is stable in the market. As the manufacturer is the only seller of the product, the market
demand curve is the demand curve of the manufacturer. Consequently, the firm charges high
price for the product, which is much higher than the price if the market was perfectly
competitive. Therefore, the manufacturing company by charging high price and serving the
entire market of the product earns super normal profit (Ivas, Lai & Sichelman 2017). Hence, it
can be inferred from the above discussion that the patent protection over the product causes the
market to become a monopoly market and as long as it is valid, the profitability of the firm is
maximum at super normal profit.
Answer 2
After expiration of patent, the other firms that are eager to make the substitute product
can enter the market and produce substitute products. The firms that would enter the market after
the patent expiration uses similar technologies for production (Feldman, 2017). Thus, as the
number of firms in the market the market power owned by the original manufacturer of the drug

3THEORY OF FIRM AND MARKET
reduces gradually. On the other hand, every new firms that enters the market charges lower price
than existing market price in order to capture market share. As the product is homogeneous and
there is no exclusiveness in factors of production, there will be continuous entry in the market of
the concerned drug. The continuous entry would keep on pressuring the price and as a result, the
price of the drug will fall. The market share will be distributed among the existing and firms. The
new firms will keep on entering the market during the first few months after the expiration of the
product in order to earn super normal profit. However, with continuous entry the price of the
drug will keep on dropping. The entry of the new firm will continue until the price becomes
equals to average variable cost. It means that firms earn normal profit (McMillan, 2018).
Therefore, it can be concluded from the above discussion that during the first few months after
the entry of the generic drug the profitability will fall continuously until it reaches the level of
zero economic profit or normal profit.

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Reference
Feldman, R. (2017). Patent Law: How Big Pharma Delays Generic Entry. The Judges'
Book, 1(1), 14.
Ghidini, G. (2018). Patent protection of innovation: a ‘monopoly’with antibodies: Balancing
Conflicts of Interest in the Constitutional Paradigm. In Rethinking Intellectual Property.
Edward Elgar Publishing.
Ivus, O., Lai, E. L. C., & Sichelman, T. M. (2017). An Economic Model of Patent
Exhaustion. San Diego Legal Studies Paper, (17-265).
McMillan, D. G. (2018). Profit Persistence and Stock Returns: Does the Market Care?. Available
at SSRN 3211826.