Question

Eli Lilly owns the patent to Xigris, which is the only approved drug for the treatment of sepsis. Sepsis is a severe illness caused by a bacterial infection, which may lead to the failure of multiple organs. Bayer manufactures aspirin, which is not covered by patent, and is one of several drugs that relieve the symptoms of the common cold.

Answer these questions in your discussion:

1. Which company has relatively more market power: Eli Lilly over treatments for sepsis, or Bayer over drugs for relieving the common cold? Explain your answer.
2. How is the difference between price and marginal revenue related to the price elasticity of demand?
3. Compare the incremental margin percentage at profit maximum for Lilly’s Xigris and Bayer’s aspirin.

Answer 1

Eli lily has more market power as the patent it has over the drug of xigris gives a monopoly power to it in the market. Whereas, Bayer is facing a market competition with lots of substitute. If the difference between price and marginal revenue is less this shows the price elasticity of that good is elastic and changes with the price of a commodity. But if the difference is more that shows price elasticity is less as demand can not change with change in price.

Lilly will have more profit because there is no close substitute to get product hence she can sell it at whatever price she wants.