1) Is the monopoly on patented pharmaceuticals warranted? What barrier to entry prevents the re-importation into the United States of pharmaceuticals sold at lower prices abroad (say, in Canada)? Pharmaceutical companies try to maintain a monopoly in the early stages of a drug in order to recover R&D investment. During this period of exclusivity they will try to make a fair profit. This is not a monopoly in the true sense of the word because this period is limited in time. It is perhaps better to describe it as a limited warranty. There are also other limitations. Pharmaceutical companies in some countries may not respect intellectual property and may copy or produce generic drugs even before the patent expires.

An important criterion of a monopoly is price control. However, in many countries, a governmental agency is responsible for setting the prices of drugs, making the influence of the manufacturers somewhat limited. This puts pressure on the manufacturers to seek overseas markets in order to maximize their chances of recovering R&D costs and to earn a profit within the period covered by the patent. By so doing the market for re-importation and parallel imports is opened. Some of the prices that the pharmaceutical manufacturers end up accepting under these circumstances do not define a true monopoly.

There are several barriers to entry that prevents re-importation into the US of drugs sold at lower prices. These include the following:
Price difference
Regulatory considerations
Trade tariffs
Cost of transport
Reimbursement procedures
Drugs would need to be kept under the same regulatory provisions as in the US, in order to be re-imported.

Analyze the contribution margin percentage on pharmaceuticals relative to ready-to eat cereals. Identify three reasons why pharmaceutical margins are higher.

Higher margins for pharmaceuticals