Effect Of Pfizer's Monopoly Power In The Market For The Prevenar-13 Vaccination In India
Introduction
This topic was chosen because I always see my grandparents taking medicines, and they often have to go out of their way to procure the medicines they need. Moreover, I myself have experienced medicines being very expensive, both in India and Singapore, even if they are for the flu. As a result, I wondered how medicines and vaccinations could be so expensive when they are necessities and how people are affected by their prices. I decided on researching India due to its large population, making it data rich and because my grandmothers purchase their medicines from there. Prevenar-13 was chosen because I knew that India had a high number of pneumonia deaths and I wanted to know if that was because Pfizer India was abusing their monopoly power. Moreover, it is not consistently agreed upon whether monopolies are good or bad so I wanted to do some research of my own to find out, resulting in the research question being formulated.
This report aims to investigate whether the monopoly power Pfizer India possesses with regards to Prevenar-13 is positive or negative by first discussing what it is and its market structure, then evaluating its efficiency and what that means for consumers, then looking into whether it undertakes substantial corporate social responsibility, assessing its affordability for Indian citizens, investigating its work with the government(national immunisation program), looking into Pfizer’s research and finally making a judgement on whether the net effect on the economy is positive or negative as well as evaluating the information and research within the report.
Methodology
The research in this essay is from secondary sources such as Pfizer themselves and an economics textbook that is recognised by the IB. Moreover, the Worldbank and CIA Worldfactbook will be used for statistics and articles from sources like the Economic times, CNN and the Hindu Business will be used. Using information from Pfizer’s annual report and website will increase the accuracy of the report. Worldbank and CIA WorldFactbook are quite widely known and used, so information from them is considered reliable. Information from the articles is trustworthy because similar information has been seen in other articles, verifying their accuracy.
Introduction to Prevenar-13 and Pfizer Limited
Pfizer is an American multinational pharmaceutical company headquartered in New York. Its Indian subsidiary Pfizer Limited(Ltd) is headquartered in Mumbai and 6 of its brands are part of India’s top 100 pharmaceutical brands. It offers vitamins and medicines for cancer, arthritis, cardiovascular disease as well as a range of other health problems. In India, Pfizer’s product Prevenar-13 is a vaccine that prevents both children and adults from being sickened by 13 types of pneumococcal bacteria. It is recommended by the Centre for Disease Control and Prevention (CDC) for children 2 years old or younger, adults 65 years old or older and consumers between the ages of 2 and 65 with conditions that weaken the immune system such as sickle cell disease, HIV, chronic heart, lung, liver or kidney diseases,etc.
Prevenar-13 is one of the 2 main pneumonia vaccines in India, with the other being Synflorix, made by British multinational pharmaceutical company, GlaxoSmithKline. Prevenar-13 is priced at Rs 3800 per dose(1 Rupee = 0. 014 USD), with 3 doses generally being required for children and 1 dose being required for adults. Its price is around Rs 2000 more than the price of Synflorix, which is sold at Rs 1800 per dose.
Pfizer’s Monopoly on Prevenar-13 Production
Pfizer Ltd is the only producer of Prevenar-13 in India. As a result, Pfizer India is part of a duopoly in the market for pneumococcal conjugate vaccines (PCV) and has monopolised the market for Prevenar-13 vaccines. Therefore, it has the power to set its own prices and there are very high barriers to entry into the market for Prevenar-13 as it was granted a patent for the vaccination by the India Patent Office in 2017, lasting until 2026, preventing other pharmaceutical companies in India from legally copying or supplying the vaccine.
A monopoly is a market structure where there is a dominant firm, or in Pfizer Ltd’s case regarding Prevenar-13 in India, only 1 firm in the market. This results in high barriers to entry into that market for other firms, especially because Pfizer India has patented the production of Prevenar-13 and makes the monopolist a price maker, which means, Pfizer India is able to set the price of Prevenar-13 because it is the only producer of the vaccine so there are no close substitutes for consumers to use if its price gets too high. The closest substitute to the Prevenar-13 vaccine is the Synflorix vaccine, which claims to protect users from 10 types of pneumococcal bacteria while Prevenar-13 protects users from 3 additional types as well, making it a more effective vaccine. Pfizer India uses this to justify the higher price of Prevenar-13 compared to Synflorix. Moreover, Pfizer Ltd’s market share in the pneumonia vaccine market is 60. 5%, with GlaxoSmithKline having the other 39. 5% of the market, making Pfizer India’s monopoly power quite large. Prevenar-13 is ranked 8th out of all brands in the Indian pharmaceutical industry, with its sales being worth Rs 2700 million last year, resulting in Pfizer India having a great deal of monopoly power in the Indian market for Prevenar-13.
Pneumonia is one of the leading causes of infant mortality in India, with 6. 3 of every 1000 children under 5 dying due to pneumonia in 2016. 158 176 children under 5, out of the 878 829 children worldwide who died due to pneumonia in 2016 were Indian. 18% of pneumonia-related infant deaths occurred in India, resulting in the demand for the vaccine being quite high and price inelastic as the vaccine is a necessity for infants. Consequently, Prevenar-13 is essential for many consumers in India, due to the large impact of pneumonia on infant mortality giving Pfizer Ltd a lot of monopoly power and price setting ability as a large increase in price will cause a less than proportional(much smaller) decrease in demand, due to the price inelasticity of the vaccine. The statistics mentioned above suggest that Prevenar-13 is being underproduced and consumed as tens of thousands of children are dying due to the inaccessibility of the vaccine. Resources are being misallocated as not enough Prevenar-13 is being produced to prevent these deaths.
The market for Prevenar-13 in India in 2018 is shown in figure 1 above, Pfizer Ltd has a monopoly in the Prevenar-13 market, as shown above. Due to Pfizer India being the only Prevenar-13 producer in India, the diagram for the firm(Pfizer India) is the same as the diagram for the market. Pfizer India produces Prevenar-13 at the profit maximising price, PPrev-13 and output QPrev-13, which are determined by the point at which MC=MR. At this point, the price of Prevenar-13 equals D; its current price 3800 Rs, which is set by Pfizer Ltd due to its monopoly power. At this price and quantity, the ATC of producing Prevenar-13 is lower than the price, as shown in the graph, allowing Pfizer Ltd to earn a profit of Rs 5 480 000 000 prior to taxation in 2018 when including all its productive activities(including other medicines and medical products). The firm sets prices very high(Rs 3800), higher than GlaxoSmithKline’s Synflorix(Rs 1800), which is the other pneumonia vaccine in the market because Prevenar-13 has a high cost of production because production is very complicated, as shown in figure 2 below.
As a result, the production of multiple doses at a time is quite expensive, resulting in ATC being quite high and prices being even higher, so the firm can continue to earn abnormal profits.
Pfizer Ltd is a private sector firm with the goal of profit maximisation so it will only produce at a price where it can not only break-even, which is when ATC=AR=D(refer to figure 1) but also a large abnormal profit so the firm can expand and employees can be paid higher wages. Moreover, it faces no competition from other firms in India due to the patent it was awarded so there is no incentive to decrease the prices of Prevenar-13 or produce in a more efficient manner to increase output as it can function at this level of output and still make a profit.
Efficiency and Welfare
Having a monopoly in the production of Prevenar 13 allows Pfizer India to produce both allocatively and productively inefficiently. Productive efficiency is achieved when resources are used in the most efficient way possible for production ie at the lowest possible cost, without any resources being wasted. While in theory, this may occur for some market structures, in reality, it is almost impossible to achieve productive efficiency as labourers are human, not machines so some wastage or inefficiency in production is inevitable. Firms achieve productive efficiency when P= minimum ATC, however, figure 2 shows that the price of prevenar 13 does not intersect with the minimum point on the ATC curve as the price is above ATC, showing that Pfizer India is not productively efficient.
Allocative efficiency is achieved when the combination of goods and services that are the most beneficial to society are being produced so resources are allocated to production in the best way possible. This is shown in figure 3 below. MB is the extra satisfaction gained by consuming one more unit of a good or service and MC is the extra cost of producing 1 additional unit of output. When these 2 are equal, society has maximised social surplus(sum of consumer and producer surplus), as shown in figure 3. At Pe and Qe, MB=MC and society’s benefits are maximised.
This diagram is not representative of a monopoly market structure, rather it represents perfect competition, which is when there are many small firms in the economy all producing the same product(homogenous), there is perfect knowledge and there are no abnormal profits in the long run. Monopolies, such as Pfizer India in the market for Prevenar-13 are allocatively inefficient as Price must equal MC to be allocatively efficient, however, in figure 1, price is much greater than MC, suggesting that resources are being underallocated to the production of Prevenar 13.
In the case of Prevenar-13, its welfare diagram is shown in figure 4 below. Consumer surplus(C) is much smaller than producer surplus(D), as the price is much higher than that of a perfect competition firm, resulting in producers gaining some of the consumer surplus. Moreover, there is a welfare loss that was not present on the allocatively efficient market diagram showing that the monopoly is making the economy worse off. Welfare loss is the benefit that is lost to society because of the inefficient allocation of resources. This loss is coming from both consumer and producer surplus as consumers are charged high prices, resulting in the loss of E and producers lose F due to the lower quantity of Qprev-13 being produced rather than Qpc like in a perfect competition market structure. One way to measure this welfare loss is the number of deaths due to pneumonia in India yearly which is 6. 3 babies in every 1000 and almost 20% of all pneumonia deaths of children under 5 worldwide. While this is not the only component of welfare loss, it is one of the most important as producing efficiently, and selling Prevenar-13 at a lower price may have prevented some of these deaths from occurring.
Vaccine production is a positive externality of consumption which means it is under consumed and there is an under allocation of resources to its production, resulting in a welfare loss. This is shown in figure 5 below. Pfizer India is currently producing at P1, which is lower than the optimal price Popt and producing at Q1, which is lower than the optimal quantity Qopt, showing that Prevenar-13 vaccines are underallocated as thousands of Indians residents are still dying due to lack of access to the vaccine. Marginal Private Benefit(MPB) is less than Marginal Social Benefit(MSB) indicating that the demand(amount of people who are willing and able to buy the good ) for Prevenar-13 is lower than the social optimum, probably because many Indians are unable to get access to healthcare or may be unable to afford Prevenar-13 so their demand does not show up on the diagram. If the price is increased, the quantity produced will naturally increase, due to the proportional relationship between supply and price and because the increase in price will incentivise Pfizer to producer more Prevenar-13 as they have a higher likelihood of making a profit. However, Prevenar-13 is already regarded as expensive in comparison to its closest substitute, Synflorix, therefore, the increase in price might be quite tiny but the increase in quantity produced must be large as over 95% of India’s 26 million birth cohort a year doesn’t get any kind of PCV vaccination.
As shown in figure 5 below, consumer surplus = a + d, which is less than the optimum surplus of a+b+f. Producer surplus is c, which is less than the optimum surplus of c+d+e+g, showing that both producers and consumers are worse off due to the externality. External benefits of b+c are occurring because vaccinations benefits society as a whole(not just consumers and producers) as the government will need to pay less for pneumonia healthcare, adults will call in sick from work due to pneumonia and there will be fewer pneumonia-related deaths. There is a welfare loss(external benefit being lost) of f+g due to the low quantity produced, making society allocatively inefficient. Overall, total surplus is a+b+c+d+e when it could be a+b+c+d+e+f+g, showing that society would be better off if more Prevenar-13 was consumed, with a higher quantity being produced.
Corporate Social Responsibility(Csr)
CSR is an alternative goal that some firms have, other than profit maximisation. It is when firms do things to benefit society such as donating to charities or raising awareness about certain issues. It occurs when firms acknowledge that they do not need to degrade the environment or carry out unethical activities to produce and earn a profit, resulting in them becoming more socially aware. Firms often do such things to improve their image and attract more consumers, by showing that they care about more than just making a profit.
Figure 5 above shows all the CSR initiatives Pfizer India undertook and is undertaking. Since 2015, over Rs 140 million have been spent on CSR initiatives to benefit society. As a result, Pfizer India has helped correct positive externalities of consumption and improved social welfare as thousands of people benefitted from their actions.
Taking the donation of medicines as an example of Pfizer’s CSR, as shown in figure 7 above, the MPC curve has shifted outwards from D1 to D2, bringing it closer to the MSB curve, increasing the price of medicines from P1 to P2 to get closer to Popt as quantity increases from Q1 to Q2 to get closer to Qopt. This has resulted in welfare loss decreasing from areas i+j+k+l+m+n to just areas j+m, leaving society better off. External benefit increases from nothing to b+g+h, due to the increase in quantity produced, increasing both consumer surplus from c+d+e to c+d+b+g and producer surplus from f to e+h+f. Some consumer surplus becomes producer surplus due to the increase in price from P1 to P2 but overall society is better off. . Similarly, the blood donation and building of sanitation units will have the same effect shown in figure 6. Both price and quantity move closer to Popt and Qopt, with MPC moving closer to MSC however, the initiatives cannot remove welfare loss entirely as they cannot provide for everyone in India who has no access to medicine as this is almost impossible to achieve. In this case, Pfizer India’s monopoly power and earning of abnormal profits has allowed them to help students, people who suffer from air pollution, people affected by natural disasters and individuals requiring blood, improving the lives of consumers.
National Immunisation Program
In 2017, Pfizer worked with GAVI, the Vaccine Alliance to provide Prevenar-13 at a subsidized rate of Rs 216 per dose(94% lower than the actual price) for the government’s national immunisation program, UIP(Universal Immunisation Program). Phase 1 involved provision to Himachal Pradesh and Uttar Pradesh at the discounted price and 5. 15 million babies gained access to Prevenar-13. With approximately 26 million children being born a year in India, phase one will cover slightly less than 20% of a year’s births. According to Pfizer Ltd’s annual report in 2018, around 2. 6% of India’s birth cohort was receiving a PCV. The UIP will increase that by approximately 87% to around 20% of the cohort.
While this is a positive thing as the vaccine is made a lot more affordable, it still is not reaching a majority of Indian babies and once funding is phased out by GAVI, the Indian government will probably have to bear the burden of subsidizing Pfizer, creating a large opportunity cost(next best alternative use of a resource other than its current use) as the money they spend on Prevenar-13 could be used to fund the construction of hospitals, schools, etc. Just like their CSR, Pfizer’s participation in the UIP is a positive externality of consumption and has a similar effect to that shown in figure 7 as vaccines are under consumed therefore by providing easier, cheaper access to them, decreases welfare loss in the form of lives lost(5. 5 million fewer lives lost) to pneumonia and related illnesses.
Affordability
India’s GDP per capita as of 1 July 2017 is around Rs 469 000, with 3 doses of Prevenar-13 costing Rs 11 400, 2. 43% of GDP per capita. GDP per capita is often used as a measure of the average income of a country’s citizens however, it does not show the distribution of income so while upper middle and upper class individuals may be able to afford Prevenar-13 for their children, others may not as people living in different Indian cities will incur different costs of living and people living in villages and rural areas may not have access to it at all, especially because 80% of India’s poor lived in rural areas in 2012. As of 2017, 60% of India’s population lives below the global poverty line of 3. 10 USD(Rs 221) a day and over 21% live on around Rs 143(2 USD) showing that Prevenar-13 is not at all affordable for over half of India’s population and they likely will never have access to it. Overall, it needs to be made much more affordable to reach those who need it most.
Research and Development and professional training
Pfizer engages in a lot of R&D, with 7 vaccines being in its pipeline of upcoming products, as shown in figure 8 below.
There is even a new PCV vaccine being developed which will probably take the place of Prevenar-13 as it will fight more strains of bacteria. Moreover, Pfizer has partnered with hospitals in India and the government to help train clinicians and build new medical institutes, as shown in figure 9 below.
To add to this, Pfizer Limited globally launched an online training course in partnership with the British Society for Antimicrobial Chemotherapy(BSAC) on Antimicrobial Stewardship and it has been completed by over 5000 healthcare workers, with over 15000 enrollments.
Pfizer’s R&D and provision of skills training is another positive externality of consumption, as shown in figure 7 so Pfizer is once again decreasing the welfare loss to society by providing more hospitals and better trained clinicians.
Conclusion
According to NGO Médecins Sans Frontières(MSF), Prevenar-13 is too expensive and the patent Pfizer has received will prevent manufacturers from producing and supplying it affordably. MSF has filed a patent opposition, to get Pfizer’s patent revoked in India and their case is strengthened by the fact that Pfizer’s Prevenar-13 patent was revoked in Europe and is being challenged in South Korea and the US.
While Pfizer engages in a lot of good deeds that benefit society such as R&D, corporate social responsibility and the training of medical officials, this does not directly benefit Prevenar-13 consumers because many of them are not included in the demand for the good, due to their inability to afford it and they are the people who need it most as their children are the most likely to get sick due to a lack of basic necessities. Moreover, Pfizer Ltd is still producing too little of the good as there is still a welfare loss occurring in the form of deaths due to pneumonia and it is completely unregulated in the market, with its patent allowing it to charge any price while producing inadequately.
Overall, Pfizer Ltd could possibly take advantage of economies of scale to decrease their average total cost by increasing their quantity produced so they produce more efficiently, allowing Prevenar-13 to become more affordable however, their monopoly power in this market is not entirely bad as the company does a lot for the community and has partnered with the government so perhaps subsidizing Prevenar-13 or setting a price ceiling for the product would help make it more affordable without disincentivizing Pfizer and encouraging it to continue with its contribution to the community. By allowing Pfizer to retain its patent and monopoly power, it will continue to make abnormal profits, incentivizing it to stay in the market and produce more however, the subsidy will help consumers afford the medicine with the government incurring its cost.
Evaluation
Some limitations of the sources were that many of the articles on Prevenar-13 stated the same things in different manners, making it quite hard to find articles that presented new information. Moreover, there were no research papers on the impact of Pfizer limited and most of the articles on Pfizer were negative, making it hard to find positives outside of the Pfizer Ltd website and present a rounded perspective. To add to this, Pfizer’s annual report contained a lot of irrelevant information, resulting in a lot of time being wasted.
One of the largest difficulties encountered was that there was hardly any information on Pfizer Ltd’s profit margins and costs of production so a large amount of monopoly theory was applied for that. This may be problematic because the monopoly diagram in figure 1 is not perfectly accurate. Moreover, figure 4 is largely theoretical because the welfare loss can be measured in many different ways such as the quality of the product in comparison to its price, opportunity cost of spending on Prevenar-13, etc and the one that was used in this report; the number of pneumonia deaths in India, making it quite difficult to quantify. Similarly, figure 7 is also mostly theoretical because the values for the prices, quantities and welfare losses cannot be found online. The issues with relying so much on theory is that theory may not be practical for example, figure 3 will probably never occur in real life as there will never be no wastage or a perfect utilisation of resources because we are human.
To conclude, this essay uses sources that are quite reliable albeit slightly limited and relies quite a bit on economic theory, which can have its issues at times but it does consider many components of monopolies and business organisations to answer the research question.
