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A company that sells a patented, highly specialized medication for a chronic condition is considering a permanent 30% price increase. The medication has no direct competitors. Two executives are debating the strategy:
- Executive A argues: "Let's proceed. In the first six months, our revenue will soar. Patients depend on this medication daily and have no other immediate choice, so the quantity demanded will barely drop."
- Executive B argues: "I'm cautious. This price hike could accelerate research and development by other firms to create a substitute. Within a few years, we might face new competition that erodes our market share, or doctors may start prescribing older, less effective treatments more often."
Based on the economic principles of demand over different time horizons, which executive's reasoning best incorporates the potential long-term risks?
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A company that sells a patented, highly specialized medication for a chronic condition is considering a permanent 30% price increase. The medication has no direct competitors. Two executives are debating the strategy:
- Executive A argues: "Let's proceed. In the first six months, our revenue will soar. Patients depend on this medication daily and have no other immediate choice, so the quantity demanded will barely drop."
- Executive B argues: "I'm cautious. This price hike could accelerate research and development by other firms to create a substitute. Within a few years, we might face new competition that erodes our market share, or doctors may start prescribing older, less effective treatments more often."
Based on the economic principles of demand over different time horizons, which executive's reasoning best incorporates the potential long-term risks?