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Monopoly power

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Normally, I don’t lie, but I told a deliberate porky pie some years ago. I’m not sorry that I failed to tell the truth and would do it again without hesitation given the same circumstances. The mistruth in question related to a short essay that I wrote over 20 years ago as part of my MBA degree. I was undertaking a unit of study in economics and was required to submit a paper that, in part, required me to espouse the benefits of monopoly.

I was in no doubt from the class lecture that my professor did not share my (private) views about the evils of monopoly. At the time, I was a single parent, holding down a full-time executive job and studying part-time. I was wearing many hats and was not going to get into a philosophical debate with an economics professor who might fail me if I took an opposite position to his own intractable worldview.

So I towed the party line in my essay and quoted the work of renowned Austrian economist, Joseph Schumpeter. Among other things, Schumpeter is remembered for arguing that some degree of monopoly (including the monopolies that emanate from drug patents) is preferable to perfect competition. I was awarded a High Distinction for my academic efforts. However, if the truth be known, I’m a free-marketeer who believes in the cut and thrust of open competition - even with its imperfections.

Experience has taught me that open competition invariably produces the best outcomes for consumers, not monopoly. The classic rebuttal to this is that companies involved in cut-throat competition face a daily battle for survival. Given this, they are allegedly unable to allocate sufficient time to innovate. Monopolies, on the other hand, are protected from market forces and can therefore devote more time to research and development.

I reject the assertion that firms in competitive markets do not innovate as they must do this to stay ahead of the competition. However, I do acknowledge that under perfect competition, some socially desirable innovations may not be produced. In such cases, economists argue that firms with monopoly power have the necessary incentive to introduce socially valuable goods. A classic example is the pharmaceutical industry and the drug patent.

The sums required to bring prescription drugs to the market are jaw-dropping. According to the Boston-based pharmacy research group, The Tufts Center, drug makers can expect to spend US$2.558 billion researching, developing and winning approval to sell a new prescription medicine. Development costs have more than doubled over the past decade as scientists tackle more complex diseases.

The pharmaceutical industry has long argued that its development efforts must be adequately protected and this is done through government issued patents. Patent protection effectively enables a drug company to monopolise the market. It’s the payoff for shouldering the significant risk and astronomical costs of developing new drugs. Patents enable drug developers to charge whatever price the market will bear, without fear of competition, to recoup their investment as well as make a profit.

The problem with this approach is that it does not deliver affordable drugs to the masses. This is exactly what happened when a treatment for HIV infection was developed two decades ago. The drug was expensive - US$10,000 per person per year - making it completely unaffordable to people in Africa. While AIDS sufferers in the West were able to afford the breakthrough treatment, millions needlessly died in Africa from the AIDS epidemic. The drug company blocked access to a low-cost generic AIDS medication to protect its investment.

The big pharmaceutical companies do not want generic drug companies having free licence to copy their lifesaving drugs at affordable prices. This has given rise to a bitter innovation vs accessibility debate. As reported in a US medical journal, views on patent protection differ:

Brand-name pharmaceutical companies and international trade enthusiasts generally advocate for stronger intellectual property (IP) laws. Without the profits allowed by patent monopolies, they argue, pharmaceutical research and development (R&D) would stall, depriving patients of new medicines and the economy of new capital.

But generic drug companies and advocates for improved access to affordable medications often take a different view. They tend to argue that brand-name companies abuse the patent system, continually tweaking old molecules to extend monopolies so that prices remain high and profits remain fat.

Disputes over drug patents often end up in court, as happened in India. Over recent years, India has led the battle for affordable drugs, using legal mechanisms to overturn patents so that its generic drug companies can undercut the Western giants. Other developing nations have followed India with battles over patent protection and prices breaking out from Indonesia to Brazil.

A fundamental flaw of the medicine patent scheme is that it motivates innovation only if potential patent-holders believe they can make a handsome return on their investment. From a shareholder perspective, this is fair and understandable, but not always in the best interests of society. An example is the recent decision by pharmaceutical giant, Pfizer, to cease research on a treatment for dementia as it does not stack-up financially.

This has dashed the hopes of millions suffering from Alzheimer’s and Parkinson’s and those at risk of developing one of these devastating diseases. The need to generate value for shareholders will see Pfizer re-allocate R&D funding to other areas. But this is cold comfort to patients and their families affected by neurological diseases, as critics of Pfizer's new direction are eager to make clear.

The belief that monopolies and high prices are a “necessary evil” in financing the development of new medicines needs to be challenged. The current medicine patent system is flawed and governments must do more of the heavy lifting regarding financing research into new drugs. This might be a bitter pill for the drug companies to swallow, but a welcome tonic for the masses. With research costs paid upfront by governments, most drugs would be available for the same price as a bottle of generic aspirin.

Now that’s good medicine and something that I could have argued in my essay 20 plus years ago. But few would have listened then and not much has changed in the intervening period. Sadly, putting patients before profits remains a pipe dream.

Regards,
Paul J. Thomas

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CEO Paul Thomas