Time scale Fri 6th Tues Fri 13th Fri 20th Mon 23rd Exam on Mon 23rd Jan Fri 6th Today! DR review – Pharma Tues MC & diagram Fri 13th Applying ec theory to business scenarios / Game Theory Timed MC practice- will be marked for you… Fri 20th LAST LESSON: Monopsony revision & anything else you want to review Mon 23rd Exam pm 1h 30m

The Paper 1h 30m Total marks = 72 8 MC = 32 marks 1 DR question from a choice of 2 = 40 marks DR = 4 part question varies in mark distribution but typically: starts with a 4 mark question then 3 questions requiring evaluation usually between 8 and 16 marks

Pharmaceutical Companies Jan 2010 Unit 3

Complete this DR and hand in on MONDAY If you want it marked! Homework Complete this DR and hand in on MONDAY If you want it marked!

What are your 1st impressions? ….before you see the exam Q’s????

You have 4 minutes to answer Qa

What is market capitalisation? What have you written? Theory (2 marks): An oligopoly (1 mark) – at least reference to one characteristic (1 mark) Application to pharmaceutical industry (2 marks): identification of characteristics in evidence provided What is market capitalisation? Number & value of shares in a company

Evaluation – 50% from now on… 16 marks – 8 for ev - make 3-4 points 12 marks – 6 for ev – make 3 points 8 marks – 4 for ev - make 1-2 points

How do I tackle an evaluation question? Identify and define the relevant theory (Knowledge) Explain how it operates in the context of the case (Application and Analysis) Review how effective it is likely to be and what other factors may influence the outcomes (Evaluation)

Next Q

Then, Evaluation..However…what are the potential difficulties? b) Discuss the benefits that Merck might expect to gain through the takeover of Schering-Plough. (12) KAA 6 marks Identification and explanation of up to 3 benefits to Merck (2+2+2 or 3+3 or 3+2+1) Evaluation = 6 marks Divide your page: First write down 3 benefits that Merck is expecting will come out the merger Then, Evaluation..However…what are the potential difficulties?

Benefits that Merck might expect to gain through the takeover KAA marks These may include Economies of scale (accept 3 economies of scale as different factors) – marketing, financial, risk bearing, R &D Access to new markets e.g. Schering 70% of market outside US Access to new patents Protection from unwanted predators Higher market share, e.g. elimination of competition, widening scope Must be benefits to Merck, not other stakeholders

Evaluation issues Evaluation: Award 6 marks Factors may include: Diseconomies of scale Likely costs of the merger e.g. dilution of shareholder value Possible investigation by competition agencies such as the Federal Trade Commission Possibility that the merger might not succeed Possibility that the firms will not be able to adequately integrate Time lags in realising the benefits.

Examiner feedback Better answers developed ‘more sales’ and ‘more profit’ into well-argued points about economies of scale and market power, or used application in the context of the pharmaceutical industry, for example with reference to R&D and drug development. There was a worrying misunderstanding of economies of scale as a simple fall in average cost as output increases, without any concept of the long run. Managerial economies are not equivalent to rationalisation, and synergies are not simply cost cutting because of overlap of job description.

Evaluation points Relatively few answers gave explicit recognition to fact that the process of merger itself is not cost-free… and that net benefits need to be judged against these cost, the possible divorce of ownership and control, and the danger that, depending on the terms, the takeover might, at least in the short term, benefit the shareholders of Schering-Plough at the expense of those in Merck.

Next Q

What would your selection for strategies be? Evaluate one pricing and one non-pricing strategy that Merck could adopt to increase sales. (12) 6 KAA marks of which (3 marks) for price strategy and (3 marks) for non-price. What would your selection for strategies be?

Price strategy Predatory pricing Limit pricing Sales maximisation 1 mark for ONE strategy written 2 marks for application & analysis i.e. relevant to pharmaceutical & what’s good / bad about it Predatory pricing Limit pricing Sales maximisation Revenue maximisation Buy one get one free Price discrimination Undercutting rivals

Non price strategy Marketing campaign to win business customers. Advertising Promotion through other means, bundling products (which may be identical) Investment into new technology to increase productivity. Move production abroad External growth Further increases in efficiency Improve product quality 1 mark for ONE strategy written 2 marks for application & analysis i.e. relevant to pharmaceutical & what’s good / bad about it

Evaluation issues What could they be?

There may be retaliation, e.g. price war It may be harder to make further increases in efficiency; all firms trying to engage in R&D Investment /R&D is expensive and there is no guarantee of success. Predatory pricing is illegal so there might be fines Improving product quality is expensive Depends on PEDs Short term/long term success Marketing is expensive and no guarantee of success Benefits or costs to other stakeholders.

Examiner feedback The stronger answers discussed interdependence with other firms, such as price wars and the illegality of predatory pricing as opposed to other pricing strategies. Advertising was the most popular non-pricing strategy. Only the better answers seemed to recognise the differences between over-the-counter sales, prescription sales, and sales for use by corporate bodies and government agencies, and the consequences these might have for pricing strategies and marketing. KAA marks were unlikely to rise above 4/6 when merely offering abstract theory unrelated to the pharmaceutical industry. The evaluation was usually that advertising is a sunk cost. Answers should be applied as much as possible to context, and development should have been extended beyond the very formulaic advertising answers, using as much economic analysis as possible. One major issue that could be picked up from the text is that medicines are largely sold to the NHS and private doctors, and a national TV campaign would not be appropriate in this context.

To what extent would further mergers and takeovers in the pharmaceutical industry be in the best interests of consumers and employees? (12) KAA 6 marks (3 marks for consumers and 3 marks for employees) of which (3 or 2+1) Evaluation 6 marks (3 + 3 marks or 2 + 2 + 2 marks) Divide your page: First identify and explain possible advantages to consumers Second identify and explain possible advantages to employees Evaluation..However…what are the potential difficulties?

A game of two halves KAA: Identify and explain the advantages to consumers Identify and explain the advantages to employees Evaluation: Identify the potential disadvantages to both

Identification and explanation of advantages to consumers Economies of scale and other synergies mean lower LRAC and therefore lower prices Greater profits/R & D budgets mean more breakthroughs Reduction in competition may mean firms can divide up market to research particular areas of expertise, so more choice for consumers

Identification and explanation of advantages to Employees Increased job security as profits rise Higher wages/perks Share options increase in value More scope for promotion in larger firms Allow non worsening situation as being in the interests of employees

Evaluation issues Less choice because there are fewer firms Greater possibility of collusion to raise prices Less incentive to innovate and produce better drugs Increased chance of x-inefficiency and exploitation or price discrimination Prices rise if there are diseconomies of scale Worker redundancies Morale issues

Examiner feedback recognition that the customers are likely to be health service providers and not individual was rarely seen. Also there was difficulty in applying the issues to further mergers in the pharmaceutical industry. The question proved to be a good discriminator.

Complete this DR and hand in on MONDAY If you want it marked! Homework Complete this DR and hand in on MONDAY If you want it marked!