A firm with a large market share possesses substantial market power due to a patent covering a key product. The patent is due to expire in 12 months and at that stage competitors will be able to produce generic versions of the product.
a. What implications does the expiry of the patent have for the firm’s market power - (a) before expiry; and (b) after expiry?
Explain your answer. Make explicit any assumptions that you need to make to form a view.
b. The company decides to introduce its own generic product prior to expiry of the patent. It sets up a loyalty program which offers substantial rebates at the end of a period if certain specified volumes of product (branded and generic) are purchased. Is this a competition issue? Why or why not?