Explaining the Link Between Competition and Pricing
A pharmaceutical company's patent on a best-selling drug has just expired, allowing several other companies to produce and sell generic versions of the same medication. Explain, in economic terms, why the original company will likely be forced to reduce its price markup. Your explanation must connect the change in market competition to the concept of price elasticity of demand.
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Explaining the Link Between Competition and Pricing
A pharmaceutical company's patent on a popular drug expires, allowing several other companies to begin producing and selling generic versions. According to the principles of price setting, the original company should now increase its markup over marginal cost to compensate for the lost market share.
A firm operating in a market with very few competitors and selling a product with no close substitutes will likely set its price with a small markup over its marginal cost.