Question

The​ Mini-Case "Pay-for-Delay​ Agreements" states that some incumbent producers of drugs with expiring patents paid potential generic producers to delay entry into the market. Why were incumbents willing to offer enough to potential entrants to make them delay​ entry? How will the 2013 Supreme Court decision allowing potential legal action against the companies affect this​ calculation? Incumbents were willing to offer enough to potential entrants to make them delay their entry to A. increase market competition. B. eventually deter entry completely. C. charge a monopoly price. D. produce generic drugs. E. lower fixed costs.

Answer 1

Answer: charge a monopoly price

Explanation:

Patents provide an exclusive right to the firm in the production and sale of a drug. This provides the firm exclusive market power to decide the price and the quantity and therefore the firm is able to charge a monopoly price and also earn monopoly profits.

When an existing patent expires and the generic producers enter the market, the price reduces due to an increase in the supply of the erstwhile patented drug. This will reduce the monopoly profit of incumbent producers. Therefore, they will seek to deter the entry of generic drug makers in order to safeguard their monopoly profits and price.

Therefore, incumbents were willing to give enough to potential entrants so as to make them delay entry to charge a monopoly price.

The effect of the 2013 Supreme Court decision allowing legal action against these companies is increase in the cost of pay-for-delay agreements and also reduce incumbent profits from these agreements.