Does the Lerner index make sense in this situation? Explain.

Suppose that in 2006, the average retail price of a Canon digital camera was $240 and that Canon’s marginal cost was $180 per camera.
January 4, 2018
If approved, by how much would the post-merger Herfindahl-Hirschman index increase? Based only on this information, do you think the Justice Department would challenge the merger? Explain.
January 4, 2018

Does the Lerner index make sense in this situation? Explain.

Recently, Pfizer and Allergan-the makers of Viagra and Botox, respectively-initiated a $160 billion merger. 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 Food and Drug Administration. For instance, Allergan spent large sums of money developing its popular wrinkle-removing neurotoxin, Botox, which is currently protected under a patent. Botox sells for about $15 per vial. Calculate the Lerner index if the marginal cost of producing Botox is $1.50 per vial. Does the Lerner index make sense in this situation? Explain.

 

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