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Drugs, Big Business and Community Service: Kicking the Chemists in the Margins

Market Power: price takers and price setters

Price takers are firms that have no option other than to charge the market price for their good or service. Their average and marginal revenues will be horizontal at the same level as the market price. Even large chains of chemists such as Boots may find that they are price takers in a market soon to be dominated by the large supermarket retailers.

Price takers	Price setters

Price setters are firms powerful enough to set the price that they charge in a market. In general, the greater the market share they have, the more market power they wield. The greater the power, the closer their demand curve will be to the market demand curve. This means that the supermarket chains will be selling over-the-counter medicines with price inelastic demand. It is a matter for conjecture whether high street chemists are likely to be in this position.

The danger with legal price fixing systems such as the RPM is that price is set at a level where the producer is making supernormal profit. The producer has power to influence the market for their goods or services, keeping prices artificially high. This can be seen on the diagram above. The supernormal profit is the area shown.

Asda, who were supporting calls to abolish RPM for over-the-counter medicines, has felt the power of the drugs companies. Every time it tried to cut prices of well-known brands of medicines, the drugs firms served injunctions preventing the store from doing so.

All this is understandable, perhaps, considering that the over-the-counter drug market is worth over £1.5 billion a year.

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