Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

ECON 309 SPRING 2022

RESEARCH PROJECT STEP 1: BACKGROUND

Question 1: Choose a Topic 

1.a What’s your topic? (1 mark)

Choose a topic from the ones available on Brightspace, or consult the instructor ([email protected]) to have a different topic approved.

 

Topic Chosen: Reference Pricing of Drugs in B.C.

[In British Columbia, the Reference Drug Program oversees the reference pricing of drugs in the province. The program classifies seven therapeutic classes of drugs and PharmaCare determines an amount that it will cover for Canadians.]


1.b Why did you choose this topic? (4 marks)

Why did you choose this topic? Why does it interest you? What do you hope to learn? Note: While it is, of course, very difficult to get this ‘wrong’, this is a challenge question, and you will be marked in part (2 of the 4 marks) on how well you communicate your ideas to the reader.

[I chose this topic because the pharmaceutical industry is a critical one to Canadians. It is important to learn more about the practices and regulations of this industry so that its products can reach the people that need it the most. A growing concern over healthcare costs have likely shaken the confidence of the average Canadian. This examination towards reference pricing may yield positive or negative findings towards it effectiveness. It interests me because this would be a good learning opportunity to learn about an industry that I am not knowledgeable of. I hope to learn more about this industry and how it regulated, as well as how prices for drugs are maintained in British Columbia.]

 

Question 2: Write a “Backgrounder” for your topic

2.a Background (Regular Question)

Write a short summary of the necessary background to understand the situation. Assume your target audience is an intelligent member of the general public who has never heard of your topic before. 

Things to include:

· What industry or group of industries are you looking at?

· Do we need any extra historical, economic, cultural, scientific, geographic or political background to understand what’s going on? If so, include it.

· Introduce us to the main players (firms, consumers, other affected parties).

· Do the firms (and others) see themselves as collaborators, competitors, or something else? Why?

[Reference pricing is something that occurs regularly during transactions, we often reference other products when purchasing something. We often prefer cheaper products, and require a reasoning to support the premium for the more expensive good. We do this with virtually any good that we purchase, however, the drugs that we consume in our province falls to the jurisdiction of the government. Reference pricing in the pharmaceutical industries involves government agents deciding on a reimbursement and having the buyer pay the difference for the medicine (Lopez-Casasnovas & Puig-Junoy, 2000). Reference pricing for medicine can be observed globally, with each system operating differently.

The firms or the government sees themselves as collaborators of the consumer, but in reality, reference pricing reduces the information available to the consumer. The government believes that subsidizing these drugs is providing a benefit to the average consumer, however, the governemnt’s action could lead to supply problems (Lopez-Casasnovas & Puig-Junoy, 2000). This means that a careful examination of the pharmaceutical market is necessary.]

Cite the sources used in APA format:

[Lopez-Casasnovas, G. & Puig-Junoy, J. (2000). Review of the literature on reference pricing. Health Policy, 54(2), 87-123. Retrieved from https://doi-org.ezproxy.library.uvic.ca/10.1016/S0168-8510(00)00100-7]

Help and inspiration for writing a background

The following are two excellent, short published backgrounds that you may wish to draw inspiration from:

 

Section II. THE WASTE DISPOSAL INDUSTRY on pages 486-489 of

· Sanderson, M. & Winter, R. A. (2002). “PROFITS” VERSUS “RENTS” IN ANTITRUST ANALYSIS: AN APPLICATION TO THE CANADIAN WASTE SERVICES MERGER. Antitrust Law Journal, 70(2), 485-511. Retrieved from https://www-jstor-org.ezproxy.library.uvic.ca/stable/40843563 

In just a few short pages, it tells you everything you need to know about the waste disposal industry in southern Ontario in order to understand the case being studied. (This paper is also the assigned reading for Assignment 4).

Section I on pages 397-398 of

· Deutsch, A. (1965). Joint Products and Basing Point Pricing: The Case of Caustic Soda and Liquid Chlornie. The Canadian Journal of Economics and Political Science, 31(3), 397-401. Retrieved from https://www-jstor-org.ezproxy.library.uvic.ca/stable/139739 

An excellent, concise background on the details of the chlorine and caustic soda industries needed to understand the phenomenon being studied (basing point pricing). As an exemplar, its main fault is that it doesn’t explain what chlorine and caustic soda are used for – what gives them value to their purchasers.

 

Question 3: Defining the market

 3.a Market definition (Regular question)

What market are you looking at? Use what we’ll cover in class to define the market using appropriate arguments based on one or a combination of elasticities, substitutes, hypothetical monopolist tests, critical loss analysis, etc.

[According to Lopez-Casasnovas & Puig-Junoy (2000), the drugs companies which operate in the pharmaceutical market are oligopolies. Drug companies face a limited number of competitors and depending on the product’s treatment, have numerous barriers to entry. The nature of the market is reinforced by the different type of products catering to different illnesses. This further creates a market that has an inelastic demand. The necessity of medicine and the difficulty of entering such a market results in a market that is an oligopoly. Substitutes for drugs exists only in the brand, for medicine has no close substitutes. If it is difficult for new suppliers to enter, the consumer may be the ones subsidizing the drug costs themselves.]

Cite the sources used in APA format:

[Lopez-Casasnovas, G. & Puig-Junoy, J. (2000). Review of the literature on reference pricing. Health Policy, 54(2), 87-123. Retrieved from https://doi-org.ezproxy.library.uvic.ca/10.1016/S0168-8510(00)00100-7]

 

Help and advice for writing your market definition

 

Make sure you avoid the cellophane fallacy: in one famous case from the 1950s, a U.S. court determined that cellophane and other transparent wrapping materials were in the same market, because at the current price of cellophane, consumers were substituting other transparent wrapping materials for cellophane.

The problem? The company that owned the patent to cellophane, DuPont, had used the market power granted by their patent to raise the price of cellophane far above its competitive level. The only reason that other wrappings were seen as substitutes for cellophane was DuPont’s monopoly pricing. If cellophane were priced competitively, the other wrappings would not be seen as substitutes.

When defining the market, try to think of the market as it would be if the firms you’re looking at weren’t behaving badly.

Need more help? These sources may prove useful.

· Sections ‘X. Market Definition’ on pages 70-78, and ‘3. Evidence on Market Definition’ on pages 164-173 of The Law and Economics of Canadian Competition Policy survey the basic concepts behind market definition.

· Some of you may find the discussion of market definition in Chapter 3 of Motta’s Competition Policy: Theory and Practice to be more readable.

· If you have chosen a topic that involves platform economics or multi-sided firms, be sure to read Section III. MARKET DEFINITION IN CASES INVOLVING TWO-SIDED PLATFORMS and IV. TWO-SIDED CRITICAL LOSS ANALYSIS AND SSNIP TESTS on pages 141-154 of the Platform Economics Textbook.


Question 4: Barriers to Entry, Round 1

Note: This is a challenge question because it asks you to work with concepts we won’t have covered properly in class before the due date. By definition, that exceeds course expectations. You will be asked to analyze relevant barriers to entry as a required part of the next research project, so working on this question now could save you time later on.

Very briefly, barriers to entry are circumstances that make it difficult for new firms to enter a market or industry. Suppose the firms you’re studying are making massive profits due to, say, having formed a cartel. What’s to stop a new firm from joining the party and taking part (or all) of the profits? That’s a barrier to entry.

Sunk costs are a classic barrier to entry. These are, very roughly, important costs that are in the past for existing firms, but in the future for any new firms thinking of entering the industry. Suppose the glitter market consists of two producers who’ve been at it for 50 years. One day, they decide to cooperate instead of compete. Glitter costs them $0.50/kg to produce, and they used to charge $0.51/kg for it, but now they’re charging $1.00/kg for it. That’s a big profit!

That big profit attracts the interest of an up-and-coming firm – but they decide NOT to enter the glitter industry, despite the 100% markup. Why? Because the two incumbents (existing firms) can produce glitter at $0.50/kg with their existing factories. The new firm would have to build a factory from scratch, and after taking those costs into account, it’s no longer worth it. The cost of the factory is sunk as far as the incumbents are concerned, but not for the new firm. Entry deterred.

There are other barriers to entry, as well. The following two articles (and the pages from our main textbook) may prove helpful in understanding and identifying them:

· Demsetz, H. (1982). Barriers to Entry. The American Economic Review, 72(1), 47-57. Retrieved from http://ezproxy.library.uvic.ca/login?url=https://www-jstor-org.ezproxy.library.uvic.ca/stable/1808574 

· Ross, T. (1993). SUNK COSTS AS A BARRIER TO ENTRY IN MERGER CASES. University of British Columbia Law Review, 27(1), 75-92. Retrieved from https://heinonline-org.ezproxy.library.uvic.ca/HOL/Page?collection=journals&handle=hein.journals/ubclr27&id=81 

·  The part labeled ‘(a) Section 93(d): Barriers to Entry’ on pages 256-263 of The Law and Economics of Canadian Competition Policy 


4.a Describe the barrier (5 marks)

Describe what you consider to be the  most significant barrier to entry in the market and situation you are studying. Be specific, and back up your claims with logical arguments and evidence (from journal articles, etc.). If you really want to, you can describe more than one barrier to entry, but this is not necessary for full marks.


[The most important barrier to entry are patents, drugs are impossible replicate but the patents prevent generic brands from copying the large corporations. Given that pharmaceutical companies wish to remain in control of prices, they have an incentive to engage in as many barriers as possible (Granier & Tringuard, 2009). Other significant barriers to entry include the R&D costs, as generic firms would have to engage in significant R&D before their products can be deemed safe for consumption and use. The first mover advantage and brand loyalty also serve as barriers as consumers would be more likely to prefer the drugs that they have always purchased. This implies that when consumers go to purchase their drugs, generic brands will only be examined due to their lowered prices. Large corporations typically buy out the generic brands in order to maintain their market power for their drugs.]

Cite the sources used in APA format:

· [Granier, L., & Trinquard, S. (2009). Mergers and barriers to entry in pharmaceutical markets. Applied Economics, 42(3), 297-309. https://doi.org/10.1080/00036840701604495

]

4.b How effective is the barrier? (5 marks)

Explain why the things you list are barriers to entry, and discuss how effective you believe these barriers would be at preventing entry if it became common knowledge that the firms you are studying were making unusually high profits.

[The above factors are barriers to entry because they deter smaller firms from entering the market to sell their products. Patents are natural sources of deterrence as they make it illegal for smaller firms to enter. These barriers are only effective in the short run, as patents can expire. Granier and Tinquard (2009) highlighted how big pharmaceutical companies may rely on buyouts in order to deter competition. This is a valid deterrence but a costly one, as new firms can always enter if they have the means to do so. Therefore, the R&D factor is a much better deterrent as a safe and reliable drug will require years of testing and experimentation (Rodrigues, 2006). Especially given the nature of the pharmaceutical market, where each drug is meant to treat specific illness, the R&D process becomes further complicated. It is not feasible to buy out every competitor that enters the market, so the R&D deterrent is much more effective. Brand loyalty and first mover advantage both can cease to exist, as consumer preferences can change over time. There is no guaranteed method of deterring competitors except with R&D.]

Cite the sources used in APA format:

· [Granier, L., & Trinquard, S. (2009). Mergers and barriers to entry in pharmaceutical markets. Applied Economics, 42(3), 297-309. https://doi.org/10.1080/00036840701604495


Rodrigues, V. (2006). Pseudo-generic products and barriers to entry in pharmaceutical markets: Comment. Review of Industrial Organization, 28(2), 183-187. https://doi.org/10.1007/s11151-006-0002-z

]