Project step 2

ECON 309 SPRING 2022
RESEARCH PROJECT STEP 1: BACKGROUND
DUE FEBRUARY 9, 11:59 PM (VICTORIA, B.C. TIME)

Note the later deadline when compared to the syllabus. (You can, of course, hand it in earlier if you wish.)

By submitting this assignment you agree to the following honor code, and understand that any violation of the honor code may lead to penalties including but not limited to a non-negotiable mark of zero on the assignment:

Honor Code: I guarantee that all the answers in this assignment are my own work. I have cited any outside sources that I used to create these answers in correct APA style.

Marking scheme – Make sure you answer all the questions before handing this in!

Question Out of
Question 1 5
Question 2 75
Question 3 75
(Q2 + Q3)/2 75
Question 4 10
Communication 10
Total 100

Your mark on this project is:

Q1 + (Q2 + Q3)/2 + Q4 + Communication

PROJECTS WILL BE MARKED AS SUBMITTED.
CHECK YOUR FILE UPLOADS!

Question 1: Choose a Topic

1.a What’s your topic? (1 mark)

Choose a topic from the ones available on Brightspace, or consult the instructor () to have a different topic approved.

Topic Chosen: The harm and possible benefit of strategic alliances between biotech firms in the Canadian context

The topic outlines that strategic partnerships are more cost-effective and less risky than acquisitions. Strategic relationships in Canada are being formed by biotechnology and pharmaceutical firms. Even though they are vastly different in terms of size and culture, the fact that they were formed over vastly different periods further adds to the difference. Because of financial failures in the early 20th century, when giant pharmaceuticals were stopped from increasing prices by healthcare delivery, health care legislation, and free markets, biotech’s were forced off the stock market. It is not always simple for large pharmaceutical companies, and small biotech’s to gain mutual respect, which is necessary for meaningful partnerships to succeed.
Additionally, the partnerships’ very divergent work schedules might be problematic. Biotech Company owners have to raise money constantly, but biotech giants can afford a more methodical pace due to their large cash reserves. Giants have a long-term goal in mind and will do all they can to ensure that their best connections are well-cared for and financially supported. As a result of the collaboration, the purchase will be a success when the time comes for it to happen.

1.b Why did you choose this topic? (4 marks)

Why did you choose this topic? Why does it interest you? What do you hope to learn? Note: While it is, of course, very difficult to get this ‘wrong’, this is a challenge question, and you will be marked in part (2 of the 4 marks) on how well you communicate your ideas to the reader.

This issue appealed to me because of its relevance to the present state of affairs throughout the globe. No corporation can afford to maintain the status quo in the face of rapid technological progress, which is altering one sector after another. However, no one can say with certainty which promising piece of technology will succeed and lead to the next big thing. In alliances, all bets are safe. To put it another way, partnerships offer a cheaper, less risky, and more adaptable alternative to acquisitions. Buying a firm entail purchasing both its strengths and its faults. When a successful partnership leads to a successful acquisition, the chance of a successful marriage increases by living together for a length of time.
Question 2: Write a “Backgrounder” for your topic

2.a Background (Regular Question)

Write a short summary of the necessary background to understand the situation. Assume your target audience is an intelligent member of the general public who has never heard of your topic before.

Things to include:

What industry or group of industries are you looking at?
Do we need any extra historical, economic, cultural, scientific, geographic or political background to understand what’s going on? If so, include it.
Introduce us to the main players (firms, consumers, other affected parties).
Do the firms (and others) see themselves as collaborators, competitors, or something else? Why?

The theories of high-tech company structure and inter-firm linkages are used to explain why businesses adopt internal or external techniques for institutional purposes. Strategic alliances have an effect on the organizational structure, monetary system, and operations of particular organizations, and the topic aims to determine the amount and nature of such effects. It also aims to discover which kinds of businesses are more likely to reap the benefits of alliances and, as a result, make use of inter-firm agreements at a higher rate. Biotechnology and pharmaceutical businesses are used as research subjects since a basic understanding of the new biotech has not yet been produced (Chang, 2008). This industry’s designation as a high technology one is in keeping with its skill set’s growing and sophisticated structure.
Health Canada may require other fully equipped businesses to finish final goods and interactions between companies and customers since biotechnology’s core knowledge is widely scattered and several NBFs focus on certain sectors, especially in the early stages of the companies’ existence. Inter-firm partnerships and connections come in a wide variety of forms. There are various types, but joint ventures, license agreements, manufacturing partnerships, and R&D agreements are most prevalent. Both R&D-related and non-R&D-related partnerships belong to this category. The former includes research and development arrangements, contractual arrangements, and R&D-invoked joint ventures (Chang, 2008). The latter category includes joint ventures that are purely commercial in nature. Further analysis of strategic alliances may be done using this classification, which incorporates the many creative features of enterprises as one explanatory variable.

Cite the sources used in APA format:

Chang, K. (2008). The strategic alliance of the biotechnology firm. Applied Economics, 40(23), 3089-3100. doi:10.1080/00036840600994104
Help and inspiration for writing a background

The following are two excellent, short published backgrounds that you may wish to draw inspiration from:

Section II. THE WASTE DISPOSAL INDUSTRY on pages 486-489 of

Sanderson, M. & Winter, R. A. (2002). “PROFITS” VERSUS “RENTS” IN ANTITRUST ANALYSIS: AN APPLICATION TO THE CANADIAN WASTE SERVICES MERGER. Antitrust Law Journal, 70(2), 485-511. Retrieved from https://www-jstor-org.ezproxy.library.uvic.ca/stable/40843563

In just a few short pages, it tells you everything you need to know about the waste disposal industry in southern Ontario in order to understand the case being studied. (This paper is also the assigned reading for Assignment 4).

Section I on pages 397-398 of

Deutsch, A. (1965). Joint Products and Basing Point Pricing: The Case of Caustic Soda and Liquid Chlornie. The Canadian Journal of Economics and Political Science, 31(3), 397-401. Retrieved from https://www-jstor-org.ezproxy.library.uvic.ca/stable/139739

An excellent, concise background on the details of the chlorine and caustic soda industries needed to understand the phenomenon being studied (basing point pricing). As an exemplar, its main fault is that it doesn’t explain what chlorine and caustic soda are used for – what gives them value to their purchasers.

Question 3: Defining the market

3.a Market definition (Regular question)

What market are you looking at? Use what we’ll cover in class to define the market using appropriate arguments based on one or a combination of elasticities, substitutes, hypothetical monopolist tests, critical loss analysis, etc.

A biotech business employs living organisms or by-products, including bacteria or chemicals, to make pharmaceuticals. To enter the country, both branded and generic pharmaceuticals must need prior clearance from Health Canada. The Proprietary Medicine Pricing Oversight Committee monitors patented medicines’ original and post-launch costs to ensure that they are not exorbitant.  Prices of generic medications are governed or monitored by provincial drug schemes. Published prices are more likely to remain steady due to these measures (Pontual-Ribeiro & Golovanova, 2020). Health Canada sets the scope of acceptable marketing of medications, and the marketing of drugs is restricted to claims that Health Canada has authorized. Furthermore, numerous reasons that together lead to pharmaceutical markets being distinct from other markets are listed, and then many elements defining the market are described in this essay on the economics of the Canadian biotech industry. Sales are influenced by the choices of a few big organizations, notably government drug programs, on payment and interoperability. Products that are included in prescription medication plans (and hence eligible for reimbursement) have a higher rate of success than those that are not. Drugs that can be substituted with generics often lose sales quickly because of the benefits of generic dispensing.
The basic method for defining a product market is the hypothetical monopolist test. A hypothetical monopolist in each potential market with control of the group of goods in that market is tested to see whether it can raise prices by 5% while keeping all other product terms of sale the same. Suppose the price increase is likely to lead purchasers to migrate to other goods in enough quantity to make the price increase unprofitable. In that case, the hypothesized candidate market is not the relevant market, and the next-best alternative is added to the candidate market.
It is possible to learn about items that are believed to be close rivals through the measures performed by producers. The claims made by rival product producers may be addressed by promotional activities such as detailing. Companies may respond to competition risks by expanding their product lines or conducting clinical studies. The occurrence is more likely to be connected with a clear competitive reaction if a second product is suitable for the original medicine. Additionally, data gathered from the company’s website and other promotional activities may be relevant to this investigation. Approaches to certain types of behavior should be adjusted.

Cite the sources used in APA format:

Pontual-Ribeiro, E., & Golovanova, S. (2020). A unified presentation of competition analysis in two‐sided markets. Journal of Economic Surveys, 34(3), 548-571. doi:10.1111/joes.12362
Help and advice for writing your market definition

Make sure you avoid the cellophane fallacy: in one famous case from the 1950s, a U.S. court determined that cellophane and other transparent wrapping materials were in the same market, because at the current price of cellophane, consumers were substituting other transparent wrapping materials for cellophane.

The problem? The company that owned the patent to cellophane, DuPont, had used the market power granted by their patent to raise the price of cellophane far above its competitive level. The only reason that other wrappings were seen as substitutes for cellophane was DuPont’s monopoly pricing. If cellophane were priced competitively, the other wrappings would not be seen as substitutes.

When defining the market, try to think of the market as it would be if the firms you’re looking at weren’t behaving badly.

Need more help? These sources may prove useful.

Sections ‘X. Market Definition’ on pages 70-78, and ‘3. Evidence on Market Definition’ on pages 164-173 of The Law and Economics of Canadian Competition Policy survey the basic concepts behind market definition.
Some of you may find the discussion of market definition in Chapter 3 of Motta’s Competition Policy: Theory and Practice to be more readable.
If you have chosen a topic that involves platform economics or multi-sided firms, be sure to read Section III. MARKET DEFINITION IN CASES INVOLVING TWO-SIDED PLATFORMS and IV. TWO-SIDED CRITICAL LOSS ANALYSIS AND SSNIP TESTS on pages 141-154 of the Platform Economics Textbook.

Question 4: Barriers to Entry, Round 1

Note: This is a challenge question because it asks you to work with concepts we won’t have covered properly in class before the due date. By definition, that exceeds course expectations. You will be asked to analyze relevant barriers to entry as a required part of the next research project, so working on this question now could save you time later on.

Very briefly, barriers to entry are circumstances that make it difficult for new firms to enter a market or industry. Suppose the firms you’re studying are making massive profits due to, say, having formed a cartel. What’s to stop a new firm from joining the party and taking part (or all) of the profits? That’s a barrier to entry.

Sunk costs are a classic barrier to entry. These are, very roughly, important costs that are in the past for existing firms, but in the future for any new firms thinking of entering the industry. Suppose the glitter market consists of two producers who’ve been at it for 50 years. One day, they decide to cooperate instead of compete. Glitter costs them $0.50/kg to produce, and they used to charge $0.51/kg for it, but now they’re charging $1.00/kg for it. That’s a big profit!

That big profit attracts the interest of an up-and-coming firm – but they decide NOT to enter the glitter industry, despite the 100% markup. Why? Because the two incumbents (existing firms) can produce glitter at $0.50/kg with their existing factories. The new firm would have to build a factory from scratch, and after taking those costs into account, it’s no longer worth it. The cost of the factory is sunk as far as the incumbents are concerned, but not for the new firm. Entry deterred.

There are other barriers to entry, as well. The following two articles (and the pages from our main textbook) may prove helpful in understanding and identifying them:

Demsetz, H. (1982). Barriers to Entry. The American Economic Review, 72(1), 47-57. Retrieved from http://ezproxy.library.uvic.ca/login?url=https://www-jstor-org.ezproxy.library.uvic.ca/stable/1808574
Ross, T. (1993). SUNK COSTS AS A BARRIER TO ENTRY IN MERGER CASES. University of British Columbia Law Review, 27(1), 75-92. Retrieved from https://heinonline-org.ezproxy.library.uvic.ca/HOL/Page?collection=journals&handle=hein.journals/ubclr27&id=81
The part labeled ‘(a) Section 93(d): Barriers to Entry’ on pages 256-263 of The Law and Economics of Canadian Competition Policy

4.a Describe the barrier (5 marks)

Describe what you consider to be the most significant barrier to entry in the market and situation you are studying. Be specific, and back up your claims with logical arguments and evidence (from journal articles, etc.). If you really want to, you can describe more than one barrier to entry, but this is not necessary for full marks.
A developed distribution network and sufficient infrastructure are essential for the Canadian biotech sector. This presents a significant obstacle to new entrants to the market. It is difficult for new biotech businesses to develop the same products at the exact same prices and win market share since established biotech corporations dominate the sector (Shepherd, 2014). These kinds of businesses benefit from economies of scale since they generate a lot of small items. The laws in the sector are quite strict and constantly evolving. To enter the country, both branded and generic pharmaceuticals must need prior clearance from Health Canada. Health Canada determines the extent to which a drug’s marketing may include only claims that the agency has authorized.

Cite the sources used in APA format:

[Cite your sources here]

4.b How effective is the barrier? (5 marks)

Explain why the things you list are barriers to entry, and discuss how effective you believe these barriers would be at preventing entry if it became common knowledge that the firms you are studying were making unusually high profits.

This barrier is effective since obtaining clearance has shown to be incredibly difficult, with an incredibly low success rate. The clearance process may take a long time and be incredibly costly for smaller and emerging biotech businesses. Often, well-established corporations are able to copy the product and file a 180-day market restriction invention, which in turn gives them a temporary monopoly on the item’s market. It may be very difficult for the new corporation to get control of the new drug’s monopoly.
Cite the sources used in APA format:

[Cite your sources here]