Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 2

Several years ago, Pfizer and Warner-Lambert agreed to a $90 billion merger, thus creating one of the world's largest pharmaceutical companies. Pharmaceutical companies tend to spend a greater percentage of sales on R D activities than other industries. The government encourages these R D activities by granting companies patents for drugs approved by the Federal Drug Administration. For instance, Pfizer-Warner-Lambert spent large sums of money developing its popular cholesterol-lowering drug, Lipitor, which is currently protected under a patent. Lipitor sells for about $3 per pill. Calculate the Lerner index if the marginal cost of producing Lipitor is $0.30 per pill. Does the Lerner index make sense in this situation? Explain.