Pharmaceutical Market Failure

Topics: Pharmacology, Pharmaceutical industry, Clinical trial Pages: 8 (2168 words) Published: September 10, 2013




Market Failure
The involvement of government in the pharmaceutical sector has been to a much greater extent when compared to other sectors. We have studied that in the scenario of “Perfect Markets” where consumers and sellers are left to their own to carry out business activities lead to an optimal solution. However it’s a bit different in case of pharmaceutical sector, because if pharmaceutical companies are left to their own to deal with the consumers, there are high chances of market failure. Forms of market failure

1. Information Asymmetry
Information asymmetry or imbalance is one of the prime reasons of market failure in pharmaceutical sector. For different commodities such as vegetables, fruits and others, both buyers and sellers are equally aware about its value for money and quality. But in case of pharmaceutical drugs, one party tends to know much more than the other and most often it’s the end consumers that suffer. This becomes one of the main reasons for market failure in this sector Informational problems occurring are about the:

* Drug Efficacy: the true efficacy of the drug is known to the manufacturer and both the dispenser and user of the drug remain dependent on the manufacturer for most of the information regarding its efficacy.

* Drug Quality: the question about safety and quality of the drug is always a critical one and the countries having weak regulatory authorities witness the marketing of spurious and unsafe drugs.

* Appropriateness of the drug: the patient to whom the drug is recommended always knows a bit less than the prescriber about its appropriateness for a particular disease.

Government Response
Information imbalance results in the prescriber giving misleading advice to the patient in order to increase his own profit. Some prescribers may not have complete information about the drugs being prescribed and may result in irrational prescription patterns. Government has various tools to combat to these situations and prevent market failure. These include imposing a strict regulation on promotional practices preventing the dissemination of biased or inaccurate information; provision of necessary training and information to both consumers and prescribers; promote practices to strengthen ethics in order to prevent prescribing for profits.

2. Monopoly
Failure of competition or monopoly results when there are many buyers but the numbers of sellers is limited. The pharmaceutical sector requires large investment to start the operations and the company need to ensure that it is producing on a large scale to achieve economies of scale. Now this cannot be done by everyone which poses a sort of barrier to entry in this particular sector. However with the international trade opening up, there is rarely a case of true monopoly.

Government Response
The government has tried to power the pharmaceutical sector by patent protection which encourages research and development, brand loyalty which helps in generating ever after expiry of the patent and market segmentation. One of the most obvious consequences of lack of competition in any sector is the higher price that has to be borne by the consumers. The government has responded to it shrewdly and has taken every measure to ensure that no sort of monopoly is built in the market. The government has brought up various generic substitution policies where in the generic drugs are available at cheaper prices and the government keeps a strict check on the companies by the price regulation which is very common in this sector. Recently the prices of most revenue producing drug, Augmentin manufactured by pharmaceutical giant GlaxoSmith Kline has been revised and has been brought down to almost half of the previous price by the government.

3. Externalities
In the health care sector when any individual is...
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