Every industry has particular characteristics that make it different from others in many ways. An understanding of these market structures is important for new entrants so that they can achieve returns on their investments. While some industries have less procedures and favorable characterizes for new businesses to join and break-even, there are many that are tough to enter and break-even. Beyond the break-even point, new businesses in industries begin to enjoy profits and can expand their investments. In this regard, it is always important that investors make a comprehensive analysis of the industries that they are joining to understand how they can manage their ventures. The need for having market research is something that cannot be taken for by investors. In the same way, this research is supposed to be continuous for purposes of keeping abreast with changes in the industry.
Perfectly competitive markets have been deemed hypothetical in nature. Here, it means that they are only imagined and they cannot exist. It is impossible to imagine a market structure that has no government interventions as it is in perfect competition. Additionally, it is impossible to have a market where entry and exist of firms is limited of any single barrier. Therefore, this leaves oligopolistic, oligopolies and monopolies as some of the real scenarios as far as market structures is concerned. This paper examines the pharmaceutical industry, focusing on the elements that put it into a certain market structure.
Across the world, the pharmaceutical industry is one of the most vital for the existence and survival of human beings. Across generations, people’s lifestyles and ways of life has really been changing (Lexchin et al., 2003). The challenges that people faced decades ago are not the same as those being felt in current times. Specifically, when it comes to health challenges, research into new ways of diagnosing and treating diseases is something that should be maintained. The pharmaceutical industry plays a big role in ensuring that diseases and ailments are perfectly treated. According to Mitsuhashi & Yamaga (2006), this industry is effective in giving people alleviation mechanisms and cure for various medical conditions. In doing so, it contributes to the economic growth and development of countries. These features of the industry have made it become a subject of great praise, criticism, as well as debate (Lexchin et al., 2003).
According to Garavaglia et al., (2012), this industry remains paramount to human existence since it is a huge source of innovations especially for the medical industry. Many countries invest huge amounts of their budgets on healthcare, part of which is meant for facilitation of research in the pharmaceutical industry. Because of its strategic significance, often, it is one of the most regulated industries. The drugs that are manufactured have to be evaluated to ascertain their safety levels, efficacy as well as quality. These parameters are essential conditions regarding market access for all people. The promotional aspects of the drugs and the industry are also expected to follow certain prescribed procedures for the welfare of the consumers (Garavaglia et al., 2012). In some countries, the prices of the drugs and medicines are often controlled by the government. This is always done to ensure that all people access and enjoy medical services.
Some years ago, there used to have very many companies that would manufacture drugs and medicines for curative purposes (Garavaglia et al., 2012). However, the trend seems to have changed in the recent past. This has been occasioned by many of these industries shrinking into a group of large companies that make medicines to serve large groups of people in many countries across the world. Many of the companies that operated in those times were concentrated in small regions with the largest firms accounting for not more than 3% of the market share (Cockburn, 2004). For this reasons, many of the companies in operation were less profitable. Because of the competitive nature of the industry at that time, many of these firms did not offer products of value to the consumers and it later became apparent that they could not survive twenty years down the line. According to Cockburn (2004), the competitive nature of the sector meant that those firms that could not manage the business to vanish out. On the other hand, those that wanted to remain relevant had to join hands and form large firms to challenge for more opportunities in many other countries across the world.
For this reason, this industry can be said to be highly oligopolistic. In oligopolistic markets, there are always few large firms that supply goods and services to a fairly large market (Mitsuhashi & Yamaga, 2006). Oligopolistic markets tend to have firms that offer goods that are almost similar but differentiated in terms of prices and promotional approaches. According to Garavaglia et al., (2012), oligopolistic markets tend to be quite large with high levels of innovations, profitability and control the market. One of the factors that have made the pharmaceutical industry to be large and profitable is the political influence coupled with economic factors. According to Mitsuhashi & Yamaga (2006), the different policy regimes mean that this industry benefits from the political decisions that are made in different countries. With healthcare being one of the most essential government functions, most of these companies are called upon to give their input on how governments can achieve health related goals.
It is important to realise that operating in a market structure that is characterized by few firms means that one has to be careful about the actions of the rival. In the oligopolistic pharmaceutical industry, firms often become careful in their innovation, management, and promotional approaches (Lexchin et al., 2003). For instance, when a particular firms adopts a strategy of price cuts to attract customers, it ends up getting more customers especially where the rivals stick to the former. Cockburn (2004) explains that this approach makes the other competitors to follow suit since consumers would prefer to buy from businesses that have low priced and quality goods.
Since the firms in this industry are keen on the responses and reactions of rivals to the steps they take in their businesses, this industry is keen on strategy. Mitsuhashi & Yamaga (2006) explains that strategy is essential in ensuring that firms in the oligopolistic pharmaceutical industry remain relevant in the industry. Firms have to make a decision on whether to collude and make large competitive firms or operate independently. Garavaglia et al., (2012) explain the need to remain relevant in future has seen many of the small firms in this industry collude to make large firms. Another important decision that these firms always contemplate on relates to the prices of their goods and services. According to Lexchin et al., (2003), price reduction is not always the best because it may lead companies to make huge losses from most sales. Therefore, the option that is adopted by many is simply being highly innovative. This development explains why firms in the pharmaceutical industry invest a lot of their profits in research and development. Competition in terms of their research and development potential is beneficial to clients since they end up getting quality goods and services.
Due to the competitive nature of these industries, pharmaceutical firms in oligopolistic market structures tend to use different pricing mechanisms for their success. One f the commonly used pricing approach is predatory pricing (Etro, 2010). Predatory pricing ensures that the prices of goods and service are kept as low as possible to encourage quantity sales. Firms often take this approach with the expectation that they can adjust the prices upwards slowly after they break-even. Instead, many of the firms that try to increase their prices after having entered the market find it tough. Any slight increases in prices tend to favor the competitors products and services since they are selling at the prices clients have always known.
In some cases, these firms can use the limit-pricing approach. In this strategy, prices are set at a point that deters any new entrants into the market (Etro, 2010). The price can be set so low that companies wishing to join the industry anticipate losses in their operations. It is this element that underpins the fact that entry into this industry tends to be quite complex. Because of their nature, small companies often decide to make collusions for purposes of enhancing their competitive strength (Mitsuhashi & Yamaga, 2006). There are other companies that decide to use a cost-plus strategy in pricing. In fact, Etro (2010) explains that this approach is the most common for firms in this market structure. In this strategy the firms have to make calculations of the prices that they are to charge by considering the costs of production incurred and adding a certain mark-up as profit as shown in the figure below.
Because of the shifting demand patterns that largely depend on the strategies by the particular firms, there are many non-pricing strategies that these firms often engage in. for instance, sales promotion is an important non-price strategy that ensures increase in demand (Lexchin et al., 2003). When companies invest in aggressive marketing and sales promotion, they increase awareness of their brand sin the market. In the end, customers are prompted to purchase more of their products and services compared to those firms that do not advertise. Secondly, quality improvement and after-sale services tend to increase demand for these firms (Mitsuhashi & Yamaga, 2006). Some of these services include transportation of bulky goods, demonstration of use of certain products and services among others. According to Lexchin et al., (2003), introduction of loyalty schemes is used by some companies with the aim of rewarding loyal customers and encouraging retention. Therefore, it is important to appreciate the fact remaining relevant and profitable in oligopolistic markets is an important consideration for firms in this market structure.
Just like other industries, the introduction of third-party players is always important in enhancing the demand for services among clients. Whenever clients realise that the costs of their services can be met by another party, they tend to prefer more of the product (Dickov & Kuzman, 2011). In the pharmaceutical industry, some of the third-party players that have come on board include health insurance schemes, Medicaid and medicare services depending on countries (Lexchin et al., 2003). The introduction of these schemes has played a big role in ensuring that people can access medical services and drugs. Dickov & Kuzman (2011) explains that governments also have their special schemes that work alongside this industry to ensure that the health of its entire people is well taken care of.
Health insurance has helped improve access to medical care in many countries. Since this industry is inseparable with the healthcare industry, there is always a multiplier effect whenever one benefits from factor that favors it. For instance, when healthcare centers benefit from increased demand for their, the pharmaceutical industry benefits from medicines and drugs that are used in treating patents in these hospitals. On the same note, many governments have been championing for a public-private partnership in provision of health services. It is expected that development of policies to facilitate achievement of this goal will also trigger an increase in the demand for drugs and medicines.
In conclusion, the pharmaceutical industry is one of those that have undergone a lot of transformation in the past decades. These transformations include intense regulations that have been introduced to ensure that the industry is efficient and effective in its operation. The oligopolistic nature of this industry has seen the emergence of large companies that have been born from collisions by a number of small firms. These collisions mean that entry procedures and dynamics into these industry for new firms is quite impossible, something that needs a lot of preparations. With an increase in the global population, new companies are bound to step up and enhance service delivery. Alternatively, the current companies in the industry may team up their efforts to make equally giant companies to produce services to people across the world. With advancements in technology the need to improve on innovations in these companies is something that cannot be ignored. All companies that fail to innovate have only one option, to step out of the industry. Therefore, the need for research and development will always remain an all-time high. With succeeding generations, new ways of handling emerging health issues need to be devised. This includes development of new medicines and drugs to counter diseases that are emerging. This means that the importance of the pharmaceutical industry remains a matter or prime importance.
Cockburn, I. M. (2004). The changing structure of the pharmaceutical industry. Health Affairs, 23(1), 10-22.
Dickov, V., & Kuzman, B. (2011). Analyzing Pharmaceutical Industry. National Journal of Physiology, Pharmacy and Pharmacology. NJPPP, 1(1), 1-8.
Etro, F. (2010). Endogenous market structures and antitrust policy. International Review of Economics, 57(1), 9-45.
Garavaglia, C., Malerba, F., Orsenigo, L., & Pezzoni, M. (2012). Technological regimes and demand structure in the evolution of the pharmaceutical industry. Journal of Evolutionary Economics, 22(4), 677-709.
Mitsuhashi, H., & Yamaga, H. (2006). Market and learning structures for gaining competitive advantage: An empirical study of two perspectives on multiunit-multimarket organizations. Asian Business & Management, 5(2), 225.
Lexchin, J., Bero, L. A., Djulbegovic, B., & Clark, O. (2003). Pharmaceutical industry sponsorship and research outcome and quality: systematic review. Bmj, 326(7400), 1167-1170.
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