Influence of Patent Loss on a Firms Revenues and Profitability - Assignment Example

Economics Questions Affiliation: Economics Questions Influence of Patent Loss to a Firm’s Revenues and Profitability The profitability of a firm is dependent on more than the way in which it is run. It is possible for poorly managed firms to realize higher profits compared to well-managed businesses. The profitability of a firm is dependent on whether it is possible for other firms to penetrate the market and rival with it. In case it is possible for other firms to penetrate the market, the economic profits of a firm end up being very low, even in the case of those firms that are well managed (Alden, 2014). Whenever an investor introduces a new product to the market, he applies for a patent. A patent plays a major role in terms of preventing other individuals from selling a given product for a given period. In this case, it is true that patents insulate inventors from rivalry, enabling them to charge higher prices and realize considerable economic profits. In the case of the pharmaceutical company, its revenues and profits will drop considerably once it loses patent protection. Without patent protection, it will be possible for other firms in the marketplace to introduce a similar product in the market, which will rival with the one of the pharmaceutical company. In this case, the company will start realizing reduced economic profits and eventually start counting losses. (Alden, 2014) To mitigate from this situation, it is appropriate for the pharmaceutical company to understand that loss of patents leads to generic competition, which influences future performance of the company. As such, one of the major ways in which the company can mitigate the losses incurred is by remaining dedicated to research and development (R&D) to help it introduce other patents that will raise its competitiveness, productivity, and profitability in the marketplace (Alden, 2014). 2. Price Elasticity of Demand Price elasticity of demand refers to an economics measure that is used in showing the responsiveness of demand to changes in prices of goods and services when other factors are held constant. It reflects a percentage change in the overall quantity demanded based on a one percent price change holding other factors constant. For the restaurant situated close to the college, the price elasticity of demand for local residents is lower compared to that of college students who are in session for about nine months every year. In this case, for the firm to raise its revenue, it needs to devise pricing strategies, which will help it raise revenues regardless of whether the price elasticity of demand for college students is higher (This Matter, 2015). In this case, it is appropriate for the restaurant to note the factors influencing price elasticity of demand in order to devise the effective pricing strategies for raising the firm’s revenues. Penetration pricing is one of the pricing strategies that the firm can implement to help it capture a considerable share of the market by charging low prices compared to rivals, hence attract a considerable number of college students. Even though the strategy will initially generate loss for the company, it will eventually create awareness and boost the revenues and profitability of the firm. On the other hand, the organization can implement the price skimming strategy. By implementing strategies to allow it attain a comparative advantage, price skimming would help the business to realize maximum revenue before other competitors start providing similar or other related products (Richards, 2015). 3. Selling Products to Neutral Buyers Sellers often face risks from neutral buyers while trying to maximize their anticipated revenue. Even in the case of those auctions where sellers sell individual items to buyer, the principles guiding this case result from the principle-agent problem. The properties in an auction are optimal in case those sellers consider buyers as risk neutral whereas their preferences are distributed in an independent manner. Here, one of the major conclusions is that in the event of many preference distributions, the standard “English” and “high bid” auctions are modified to provide room for a seller to attain an optimal and equivalent reserve price. These kinds of classical auctions are not equivalent in the perspective of a seller whenever buyers are neutral. The results are also not optimal in this case for two major reasons. These include the desire to insure buyers from risk as well as the desire of the sellers to exploit risk bearers with the need to screen them (Maskin & Riley, 2011). In order to confront neutral buyers, it is appropriate to introduce insurance to ensure that the marginal utility that the buyers realize is not the same as in the case where he loses. As such, it is possible for the seller to extract payment, which helps to remove risk while ensuring that the buyer remains at the same level of utility. In this case, by holding level of utilities fixed, the seller will manage to enhance his revenue. As such, it is true that insurance can induce buyers to change their bidding strategies in the event of “holding utilities fixed.” (Maskin & Riley, 2011) 4. Problem of Incomplete Information For those firms that offer high quality goods in the market that is characterized by low and high quality products, they are likely to experience additional costs for them to distinguish their products from others present in the market. In this case, the prices that these goods and services fetch will reflect the view of the consumers towards the average quality of the product. The value associated with lost transactions in the case of market failure offers incentives to firms to allow them distinguish products of high quality. Although the alternatives may end up being costly, they reflect the cost of portraying quality towards consumers. For instance, advertising is considered costly since it is a sunk cost. Nonetheless, it dictates to clients that an organization anticipates realizing profits in future. This means that the quality of a product is not below expectations (MSU, 2014). For instance, in the case of sellers of used cars that are of high quality, they are supposed to offer extended warranties while selling them. In case the product is of high quality, then the warranty would not cost anything, rather than legal and advertising costs affiliated with establishing and announcing the warranty. In this case, it would be possible for a high quality producer to distinguish his product from the one provided by other producers. In the case of low quality producers, they would witness considerable costs in case they are required to provide a similar warranty. The problem with warranty and certifications in this case, however, knowing whether a firm will remain in business for sufficient duration to allow it honor certifications and warranty. Warranties and certifications are therefore effective whenever a client believes that a reputable firm provides them (MSU, 2014). References Alden, L. (2014). Competition and Market Power. Retrieved from http://www.econoclass.com/imperfectcompetition.html Maskin, E., & Riley, J. (2011). Optimal Auctions with Risk Averse Buyers. Retrieved from http://scholar.harvard.edu/files/maskin/files/optimal_auctions_with_risk-averse_buyers.pdf MSU. (2014). Market Behavior, Information, and Market Failure. Retrieved from https://www.msu.edu/course/mba/814/wk6note.htm Richards, L. (2015). Different Types of Pricing Strategy. Retrieved from http://smallbusiness.chron.com/different-types-pricing-strategy-4688.html ThisMatter. (2015). Short-Run Profits and Losses, and Long-Run Equilibrium. 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