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Posted on April 22nd, 2014, by

It is known that in most cases, makers of patented brand-name drugs face competition from generic drugs manufacturers. This problem is the consequence of a number of incentives developed by “a highly complex and industry specific regulatory regime based on the Drug Price Competition and Patent Term Restoration Act of 1984 (or the Hatch-Waxman Act)”¯ (Hemphill, 2010: 1). Generic drug manufacturers differ from drug innovators because their goal is to produce a close substitute to its predecessor product. In the case of Prozac, Lilly should adjust the price of this drug product in order to avoid serious competition from generic drug manufacturers.

As the Hatch-Waxman Act offers an opportunity for generic drug manufactures to enter the American drug market without any investments in clinical studies to demonstrate the generic’s safety and efficacy, the Prozac price of generic manufacturers should be lower than the Prozac price of innovators. That is why Eli Lilly should adjust the price of Prozac to avoid competition in the drug market. According to David H. Austin, in the late1990s, nearly “all brand name drugs faced competition once their patents expired”¯(2007: 16). That fact led to the loss of sales of generic versions of drugs. In fact, Prozac was one of the well-known best-selling antidepressant drugs that lost “about 80% of its U.S. sales to lower price generic versions in the first month after the patent expired”¯ (Austin, 2007: 16). In this case, Eli Lilly Company should optimize the price of Prozac for the most quality-inelastic segments. Lilly may reduce the price in order to increase the sales of Prozac.

Question D

Lilly should adjust the advertising of Prozac in order to succeed in the competitive market. It is known that promotion and advertising play a significant role in the market. The promotion of the product is focused on the appropriate marketing activities that a company should undertake to communicate with customers and increase sales of the product. These activities include sales promotion, advertising and public relations (Png & Lehman, 2007). Eli Lilly Inc. as a seller should raise the advertising sales if the advertising elasticity of demand is higher as the influence of advertising of the product on the demands of the customers is relatively greater. Eli Lilly as a seller may raise the advertising sales ratio if the incremental margin is higher and each dollar of advertising can produce relatively more benefits for the company.Ā  It is clear that such revolutionary new drugs as Prozac “can build or change the reputation of the company overnight”¯ (McKenna, 2002: 90). As most drug companies enjoy high margins on new drugs, these companies should invest heavily in order to get to market first. In our case, generic can rapidly occupy the market in case a popular branded patent has expired. As a rule, “price is higher preference than brand”¯ (McKenna, 2002: 90). Drug advertising can be used to increase the demand for the product practically at any price. In this case, the main principle is to increase spending on advertising and promotion of the product “until the extra profit generated by advertising is balanced by the extra cost of advertising”¯ (Png & Lehman, 2007).

Question E

It is known that Eli Lilly can set the price of Prozac in the market and allow the market to determine the quantity of sales. In case Eli Lilly sells Prozac in only two countries, country A and country B, total cost may be reduced. According to Png and Lehman (2007), total cost of the product may increase with the scale of production. In this case, Eli Lilly could apply direct segment discrimination between the consumers in country A and the consumers in country B. In order to implement complete price discrimination, Eli Lilly should know the entire individual demand curve of the customers in the country A and the customers in the country B. Eli Lilly should divide the market into two segments based on age groups, e.g. adults and seniors. A segment is a group of customers within a larger market. In fact, direct segment discrimination can be used to set different incremental margins to each of the segments. As a rule, with application of direct segment discrimination, the price should be set in order to derive a relatively lower incremental margin percentage from the segment that has more elastic demand and a relatively higher incremental margin percentage from the segment that has less elastic demand (Png and Lehman, 2007). What is more important is that in order to apply the policy of direct segment discrimination, Eli Lilly should identify some fixed characteristics of the customers in the country A and in the country B.

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