Over the recent past, the pharmaceutical industry has experienced a change in its market structure. Companies have become increasingly competitive and aim at increasing their market share. However, the health industry has experienced these changes in some areas, with one of them being the pharmaceutical sector. The number of companies manufacturing pharmaceutical products has increased, even though they produce similar products.
Nonetheless, the companies that managed to secure a larger market share are limited. The few companies have various operating strategies that limit the entrance of other companies into the market. That said, there has been a growing oligopoly in the pharmaceutical industry as a subsector of the lager medical industry.
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An oligopoly refers to a market structure that constitutes a limited number of operators. The few numbers of market actors can occur due to allying tactically to achieve higher market returns (Chappelow, 2020) . Among the reasons for the existence of oligopoly within the pharmaceutical sector is government regulations. Government policies or regulations can have an impact on the development of an oligopoly structure. In essence, technology, legal, and economic factors contribute to either the formation, maintenance, or even dissolution of oligopolies.
In the pharmaceutical industry, some operators have contributed to the presence of an oligopoly-like structure. Some of these companies include Merck, Pfizer, and Novartis. As stated earlier, governments can contribute to the existence of oligopoly. In this case, these firms have been granted operational rights, such as patents by the government. As such, they can operate for more extended periods, without the entrance of other competitors in the market.
Similarly, this act bars other companies from entering the market, hence the presence of an oligopoly. Oligopolies have a way of sustaining themselves in the market. If they ally, then they can reduce their prices and provide services at a lower price than new entrants (Chappelow, 2020) . This move will prevent the companies that want to join the market from staying in the market, the reason being they cannot operate at a loss.
Oligopolies have various impacts on the economy. Some are positive, while others are negative. On the one hand, oligopolies simplify consumer markets. This advantage means that consumers can have a few numbers of products from which they choose the best product. This market also offers competitive pricing (Green Garage, 2017) . From the fact that high prices and consumers’ failure to like a product can prevent sales, then firms have to balance the prices for them to remain competitive in the market.
On the other hand, oligopolies have their disadvantages, including failure to promote innovation. The fact that these firms can create barriers to entrance, it means that innovative firms cannot come into play. Also, the limited number of choices does not favor the consumer since they do not have other options but to choose from the few that are available. Another disadvantage of oligopolies is the price-fixing mechanism (Green Garage, 2017) . In the case where firms in an oligopoly structure decide to collude, they could fix prices because they know consumers lack other alternative sources for their goods and services.
On the issue of consumers, oligopoly firms will not increase and reduce their prices for the sole purpose of maintaining their market shares (Adams & Williams, 2019).Therefore, from the fact that these oligopoly firms cannot raise prices on their own, consumers are not hugely affected by price increases. Other advantages, apart from price stabilization, include excellent services, and technology innovation. In oligopoly markets, most buyers are not consumers (Crea, Cavaliere & Cozzi, 2019). That said, these kinds of markets mainly have buyers as consumers.
References
Adams, B., & Williams, K. R. (2019). Zone pricing in retail oligopoly. American Economic Journal: Microeconomics , 11 (1), 124-56.
Chappelow, J. (2020, March 29). Oligopoly . Retrieved April 6, 2020, from Investopedia: https://www.investopedia.com/terms/o/oligopoly.asp
Crea, G., Cavaliere, A., & Cozzi, A. (2019). Price discrimination in the Italian medical device industry: an empirical analysis. Economia Politica , 36 (2), 571-608.
Green Garage. (2017, December 6). 10 Pros and cons of oligopoly . Retrieved April 6, 2020, from Green Garage: https://greengarageblog.org/10-pros-and-cons-of-oligopoly
