In the pharmaceutical industry, branded drug manufacturers (e.g., Pfizer, Merck) and generic drug manufacturers operate in distinct strategic groups. Branded firms rely on patents and heavy R&D investment, while generics focus on low-cost production. How do mobility barriers protect the profitability of branded drug makers?

Question

In the pharmaceutical industry, branded drug manufacturers (e.g., Pfizer, Merck) and generic drug manufacturers operate in distinct strategic groups. Branded firms rely on patents and heavy R&D investment, while generics focus on low-cost production. How do mobility barriers protect the profitability of branded drug makers?

BlackTom AI · Accepted Answer

The question asks how mobility barriers protect the profitability of branded drug makers in the competition between branded firms and generic manufacturers. 
Option 1: 'Market size alone ensures profitability, regardless of strategic group dynamics.' While market size matters, profitability is not guaranteed solely by size. Mobility barriers like patents and regulatory protections limit entry by rivals within the same strategic space, so this statement ignores the crucial role of legal and regulatory protections that preserve branded firms’ profitability. 
Option 2: 'Branded firms can easily imitate generic pricing strategies, eliminating profitability differences.' In practice, generics often compete aggressively on price once patent protections expire or are circumvented, but branded firms cannot simply copy pricing to erase profitability differences while still maintaining the protections that keep competitors at bay during patent life. This misreads the nature of barriers, which are external protections, not internal pricing mimicry. 
Option 3: 'Patents and regulatory approvals act as mobility barriers, shielding branded firms from generic rivals entering their group.' This correctly identifies the core mechanism: patents grant temporary exclusivity, and regulatory approvals (e.g., for new formulations or indications) create legal and technical obstacles that sustain higher profits for branded firms by delaying entry of generics. It captures the strategic separation between groups and explains why profitability is protected. 
Option 4: 'Generic firms avoid entering the branded group due to high advertising costs, limiting competition.' Generics typically do not rely on heavy advertising; their primary advantage is low-cost production and competition on price after patent expiry. The statement inaccurately attributes generics’ behavior to advertising costs and misses the barrier effect of patents and approvals that actually restrict their entry. 
In summary, option 3 correctly explains mobility barriers as the protective mechanism for branded drug makers, while the other options either misattribute profitability protections or mischaracterize the competitive dynamics between branded and generic firms.

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