Both of these moves broke the monopoly. The Canadian government broke Bayer's monopoly and the second company moved into the market, creating a temporary oligopoly. The influx of Cipro from Mexico represented a substitute product, thereby breaking Cipro's American monopoly. This lowered the price of the drug until demand subsided -- note that it was demand that subsided and not supply. This despite the fact that the monopoly-granting patent protection was affirmed in U.S. courts (Bayer, 2002).
Eventually, the market for Cipro returned to equilibrium once the crises was over. By seeing how the market changed when introduced to different stimuli, we can better understand the characteristics of this market.
The market for Cipro -- and in general all patent-protected medicines -- began as a monopoly in equilibrium. Bayer enjoyed substantial pricing power and demand stayed at or near the demand floor as a result. When demand began to price, a shortage of the good occurred and the price when up. With higher demand, new market entrants emerged. This had unusual impacts, but they included what would be expected if a monopoly ended -- price dropped and supply increased.
When the Canadian government restored Bayer's patent- by court order - it restored the monopoly for Cipro (Spurgeon, 2001). This brought the Canadian market for the drug back into equilibrium. When demand started to falter in the U.S., so did the prices. The new entrant (Mexican Cipro) went off the market. Supplies decreased until the market was restored to its full equilibrium. Demand is normal, supply is normal and prices are normal as well.
If we checklist the Cipro market in equilibrium against what a monopoly market should look like, we can see that the market for anthrax treatment is a monopoly market. There is only one firm in the industry -- Bayer. We saw that in the two instances where the monopoly was broken, one utilized Bayer product from Mexico, the other from a Canadian company.
There must be high barriers to entry. In this case, both breaks in the monopoly were ultimately settled. The Canada situation was the most telling -- the federal government was ordered to restore the patent by the...
That is powerful defense against outsider incursions into the industry. In the U.S., patent protection was upheld, giving some barriers to entry. They were only breached by a small loophole and even then only when demand rose far above supply. Once demand and supply fell back into equilibrium, the monopoly was restored, again a demonstration of the barriers to entry in this market.
A monopolist typically charges monopoly rents on its products. They keep these rents within the bounds of the elastic demand curve. This occurred prior to the anthrax scare, which was a time of monopoly. During the brief interlude where the monopoly was broken, Bayer was unable or unwilling to raise its prices, even though the market conditions were well-suited to such action.
Most pharmaceutical markets are given patent protections that allow those markets to become monopolies for the patent owner. The Cipro case illustrates that even under extremely unusual conditions, the long-term equilibrium will difficult to disrupt. Short-term cracks appeared in the monopoly, with the expected impact on Bayer's pricing policy, but the long-term implications were relatively minimal. Supply, demand and price were quickly restored, which is evidence that a monopoly exists in this and other similarly protected pharmaceutical markets, specifically because of the patent protection.
Works Cited:
No author. (2009). Characteristics of monopolies. Investopedia. Retrieved November 18, 2009 from http://www.investopedia.com/study-guide/cfa-exam/level-1/microeconomics/cfa16.asp
Spurgeon, D. (2001). Canada forced to honour Bayer's patent on ciprofloxacin. British Medical Journal. Retrieved November 18, 2009 from http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1172996/
Bayer. (2002). Bayer's Cipro patent affirmed by U.S. courts. Bayer. Retrieved November 18, 2009 from http://www.investor.bayer.com/user_upload/1320/
No author. (2009). Monopoly, marginal revenue and demand elasticity. AmosWeb. Retrieved November 18, 2009 from http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopoly,+marginal+revenue+and+demand+elasticity
Mercer, D. (1996). Marketing. Wiley. p. 246
