question archive Several years ago, Pfizer and Warner-Lambert agreed to a $ 90 billion merger, thus creating one of the world's largest pharmaceutical companies
Several years ago, Pfizer and Warner-Lambert agreed to a $ 90 billion merger, thus creating one of the world's largest pharmaceutical companies
Subject:MarketingPrice:2.88 Bought15
Several years ago, Pfizer and Warner-Lambert agreed to a $ 90 billion merger, thus creating one of the world's largest pharmaceutical companies. Pharmaceutical companies tend to spend a greater percentage of sales on R&D activities than other industries. The government encourages these R&D activities by granting companies patents for drugs approved by the Food and Drug Administration. For instance, Pfizer-Warner-Lambert spent large sums of money developing its popular cholesterol-lowering drug, Lipitor, which is currently protected under a patent. Lipitor sells for about $ 3 per pill.
a) Calculate the Lerner index if the marginal cost of producing Lipitor is $ 0.30 per pill.
b) Does the Lerner index make sense in this situation?
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In this situation the index will be: L = (3 - 0.3) / 3 = 90%, indicating a that the firm has a very large market power.
However, in this scenario the Lerner index is not an adequate measure because the product is patented. This means that the firm is the sole producer in this Market and, therefore, has full market power (i.e. 100%).
