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Microeconomics: Medication Types and Demand Essay

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Updated: May 4th, 2021

The American market for medications is often criticized for the lack of competitiveness and the rule of large corporations. It is believed that leading drug producers influence or even form the demand and supply (Fox, 2017). Three major types of medications exist: those protected by patent, brand-name, and generic. The difference between these types of drugs largely lies in the right to produce them, which has a significant effect on the pricing policy (Danzon, Mulcahy, & Towse, 2013). This paper addresses the differences between the demand for these types of drugs with the focus on such concepts as the price elasticity of demand, income elasticity of demand, cross elasticity of demand.

Prior to considering the difference in demand, it is important to identify the primary peculiarities of the types of medications mentioned above. The development of new rugs is facilitated by the provision of patents as pharmaceuticals can invest considerable funds, face numerous risks, but gain profit from the products they develop (Greene, 2014). The period of patent protection varies across types of medications and countries.

In the USA, it is usually a period of 20 years. Companies also produce and sell drugs under certain brand names. This enables pharmaceuticals to leverage sales through the development of brand loyalty. When patents expire, companies can produce generic medications that are similar to the ones protected by this patent. The primary measure of these medications’ quality is their bioequivalence. There are no brand names, but the focus is on the major constituents.

The demand for the three types of medication differs across countries or groups of people, which has a direct effect on their price. Medications that are under patent are usually characterized by high quality and high prices. Price elasticity of demand is usually associated with this type of medications. High prices result in rather low demand. Companies tend to maintain high prices for their patented drugs (Fox, 2017).

As for medications with strong brand names, they are often more elastic than the drugs protected by patents. In order to increase revenue, pharmaceuticals choose to reduce prices, which leads to the increase in demand. The competitiveness is higher in this area compared to the market for patented drugs. Companies offer their products while customers are free to choose which one to buy. The demand for these two types of medications often depends on people’s income. The income elasticity of demand can be used to explain this link. When people’s income rises, the demand for high-quality (patented or strong brand names) medications rises.

Generic drugs are mainly sold at significantly lower prices as compared to the other two types of medications. Moreover, the cross elasticity of demand of generic drugs is quite high since the demand for brand names and patented medications goes down when generic drugs are introduced. In many cases, generic medications become substitutes for drugs with strong brand names. Nevertheless, people with low price-sensitivity do not switch to cheaper products as they are reluctant to face associated risks (Thakkar & Billa, 2013). Therefore, people’s income tends to be an influential factor affecting prices.

On balance, it is necessary to note that the major difference between patented, brand name, and generic medications is mainly associated with the right to produce the product. Drugs protected by patents are the most expensive while generics are the most affordable. People’s income is one of the central factors that have an impact on price development. It is also noteworthy that the representatives of the middle class tend to be loyal customers of some brand names as their price sensitivity is low.

References

Danzon, P., Mulcahy, A., & Towse, A. (2013). Pharmaceutical pricing in emerging markets: Effects of income, competition, and procurement. Health Economics, 24(2), 238-252.

Fox, E. (2017). . Harvard Business Review. Web.

Greene, J. A. (2014). Generic: The unbranding of modern medicine. Baltimore, MD: JHU Press.

Thakkar, K., & Billa, G. (2013). . Frontiers in Pharmacology, 4. Web.

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IvyPanda. (2021) 'Microeconomics: Medication Types and Demand'. 4 May.

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