Ever wonder why pharmaceuticals are so expensive? In this video, we show how low elasticity of demand results in monopoly markups. This is especially the case with
Ever wonder why pharmaceuticals are so expensive? In this video, we show how low elasticity of demand results in monopoly markups. This is especially the case with goods that involve the “you can’t take it with you” effect (for example, people with serious medical conditions are relatively insensitive to the price of life-saving drugs) and the “other people’s money” effect (if third parties pay for the medicine, people are less sensitive to price).
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One could be political-legal which includes all regulations and licenses and restrictions applied to various stages in the production and distribution process. These regulations and restrictions may be motivated by safety reasons, by intentions to protect local industries or other special interest groups. Examples are tariffs, high initial capital requirements, patents.
A second type may have to do with the inevitably unique nature of the value which is being marketed. It is impossible to become a supplier of 19th century symbolist painting because you cannot go back in the 19th century to paint; or to become a producer of Bordeaux wine if the demand is for wine that actually comes from Bordeaux and there is only so much land around Bordeaux to grow grapes.
A third type has to do with the nature of the production process and distribution for a particular product. In the car manufacturing industry there are high startup costs. You need to pool a large amount of investments first. There may be economies of scale which means your business becomes profitable only after you become quite big. Or there may be network effects which favor existing suppliers. Traders go to ebay simply because is larger than a contester trying to establish a new trading place.