Covid Vaccines in India are one of the most expensive vaccinations in the world; with Adar Poonawalla’s Covishield and Bharat Biotech’s Covaxin charging differential prices for private and state procurement. Both the companies claim that such high prices are required for the firms to invest in scaling up production, and for bearing the costs of further product development, manufacturing facilities, and R&D.
This revives the age-old argument about the utility, and/or the exploitative nature of monopolies in a capitalist world. It is important to review the existing literature on both sides of the spectrum, with a focused lens on pharmaceutical companies. Monopolies allow for the disproportionate allocation of market power in the hands of a few companies. In the vaccine race - Pfizer, Moderna, SII are the few who control the global supply. Pharmaceutical companies exercise monopoly power through Intellectual property rights like copyrights and patents on technology or processes - this is termed as an Intellectual monopoly.
Joseph Schumpeter, a renowned economist, claims that there exists a close and direct relationship between the market power exercised by a firm and its ability to innovate. Only companies that have market power can support the costs related to innovation and then reinforce this monopoly power through innovation. This virtuous circle leads to economic growth as well as development in society, giving way to more advanced systems, thereby justifying that the monopoly market structure is more rewarding than the ideal competitive market. These innovations which either result in a new product, or a new method of production, were famously termed as ‘Creative Destruction’ by Schumpeter. He defined it as the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."
Investments in R&D in the drug industry are very high as a percentage of total sales; reports suggest that it could be as much as 15% of the sale. One of the key issues in this industry is the management of innovative risks while one strives to gain a competitive advantage over rival organizations. There is a high cost attached to the risk of failure in pharmaceutical R&D with the development of potential medicines that are unable to meet the stringent safety standards, being terminated, sometimes after many years of investment. A huge amount of time and money is invested into R&D for these precise moments wherein they claim the reward of their hard work.
In traditional economics, there accrues a high deadweight loss to society due to the functioning of a monopoly. A monopoly, where prices can be charged as per the discretion of the monopolist such that prices are much above the marginal cost of production, is contrasted with perfect competition, where the price is exactly equal to the marginal cost to the producer. Monopoly leaves out people from participating in the market because their willingness to pay for the particular product is lower than the price demanded but higher than the marginal cost incurred. The additional profit that is credited to the monopolist comes at the cost of consumer welfare and reduces the society’s surplus. That is, monopoly forces a misallocation of resources, with too few resources being used in the monopolized industries and too many resources used to lesser advantage in other competitive markets.
Beyond this, the Schumpeterian view is challenged by Arrow (1962) and DasGupta and Stiglitz (1980). They prove that the incentives to innovate are stronger in a competitive market than in a monopoly. Geroski (1990) lists several reasons against the advantages of monopoly on innovation. Firstly, lack of competition subdues innovation since consumers do not have alternatives. Secondly, it increases the cost to society since multiple firms invest in search of innovation. In addition, Reksulak et al. (2005) argued that cost-saving innovation raised the opportunity cost of monopoly. As a monopolist with market power became more efficient, greater amounts of surplus were sacrificed by consumers since the former increasingly failed to produce the new and larger competitive output. Thus, innovation raises the social value of competition by raising the deadweight cost of monopoly.
Consequently, as soon as the patent expires, the incumbent monopolist may expect to face competition by a growing number of generic producers, selling at prices a lot closer to marginal cost than the patented product does. A historic example would be the exponential growth in steam engine railways in the 1800s when James Watt’s 1769 patent expired. In the pharmaceutical industry, once this patent expires, companies produce generic drugs which are available at prices that are between 30% and 80% lower than the originally patented product.
In 1958, the distinguished economist Fritz Machlup wrote “it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting [a patent system].”However, if pharmaceutical companies are forced to charge nominal prices thereby eliminating their incentives, would they continue to invest in the advancement and innovation of healthcare?
Beyond the economic arguments about the costs and benefits of the intellectual monopoly enjoyed by pharmaceutical companies, it is important to take cognizance of the times we live in. In these times when India, as a country suffers through a cruel second wave, economic motives need to be reconsidered. The debate over the equitable distribution and accessibility to these vaccines is a matter of morality as much as it is of monopolies.
Written by: Ananya Dhanuka (firstname.lastname@example.org)
Edited by: Divij Gera