A pharmaceutical company was recently awarded a patent for its newly developed drug that is the first to treat a common chronic condition. The company will have exclusive right to manufacture the drug for the next 20 years. What is the market structure of this new drug shortly after its discovery?

Rationale

Shortly after its discovery, the market structure of the new drug is a monopoly.

The pharmaceutical company holds a patent that grants it exclusive rights to manufacture the drug for 20 years, establishing a monopoly in the market. This exclusivity allows the company to set prices without competition, as no other firm can produce or sell the same drug during the patent period.

A (Perfect competition) YOUR ANSWER

In a perfectly competitive market, numerous firms sell identical products, and no single firm can influence market prices. However, the existence of a patent means the company is the sole producer of this drug, eliminating the conditions necessary for perfect competition, such as many sellers and homogeneous products.

B (Monopoly) CORRECT

The situation described fits a monopoly, as the pharmaceutical company has exclusive control over the production and sale of the drug due to its patent. This allows the company to dictate prices and limit supply without competition, characteristic of monopolistic markets.

C (Monopolistic competition) YOUR ANSWER

Monopolistic competition involves many firms offering differentiated products, enabling them to have some control over prices. Since the patent restricts production to one company, this market structure does not apply, as there are no competing products at this initial stage.

D (Oligopoly) YOUR ANSWER

An oligopoly is characterized by a few firms dominating the market, often leading to collusion on prices and output. However, the patent awarded to the pharmaceutical company means there are no competing firms in the market for this drug, disqualifying this structure.

Conclusion

The pharmaceutical company's patent creates a monopoly by granting it exclusive rights to manufacture and sell the drug for 20 years, leaving no room for competition. This unique market structure allows for price-setting control and complete market dominance, distinguishing it from other competitive market forms such as perfect competition, monopolistic competition, and oligopoly.

A pharmaceutical company was recently awarded a patent for its newly developed drug that is the first to treat a common chronic condition. The company will have exclusive right to manufacture the drug for the next 20 years. What is the market structure of this new drug shortly after its discovery?

Shortly after its discovery, the market structure of the new drug is a monopoly.

Related Questions

Related Quizzes

How familiar were you with this question?

Report an Issue

Rate this Practice Test