Friday, October 18, 2013

Patent invalidation ==> entry ==> lower (or higher?) prices

The summer, the Supreme Court invalidated patent rights for human DNA.

Until the ruling, Myriad held patents--which gave them a monopoly--on genetic screening tests used to predict the risk of breast and ovarian cancer. These tests generated $519 million in revenue for Myriad, about 85% of the company's total revenue.

Since the ruling, Quest Diagnostics has begun selling its own tests that will have a list price of $2,500, $800 less than the incumbent's price.

If customers are all similar, then it is likely that Myriad will respond with price cuts of its own.  However, as we have noted before (When entry raises price) this is not necessary:

When a branded drug faces entry by a generic copy, it will stop promoting the brand (as that increases demand for the generic), and raise price. The brand loses its low-value (and more price-elastic) customers to the generic so that branded demand becomes less elastic. The brand responds by raising price.

If entry by Quest makes Myriad's demand less elastic--by stealing its more price sensitive customers--Myriad may end up raising price.

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