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The economics of profit-cap policy: Big Pharma, Big Tech, and the duopoly rule

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  • Basu, Kaushik
  • Pitsuwan, Fikri
  • Zhang, Pengfei

Abstract

A known policy dilemma occurs between the need to curb extra-large profits by some industries, like pharmaceuticals, and the need to ensure the incentive to produce is not damaged. This paper shows that a profit cap, imposed via taxation on a group of firms, can simultaneously eliminate inefficiency and excess profit by intensifying competition among oligopolistic firms. The result has a direct bearing on policy debates on COVID-19 vaccine sharing and the use of vaccine donation as a “humanitarian obligation,” and, more generally, on the regulatory institutions needed for industries that rely on R&D.

Suggested Citation

  • Basu, Kaushik & Pitsuwan, Fikri & Zhang, Pengfei, 2023. "The economics of profit-cap policy: Big Pharma, Big Tech, and the duopoly rule," Journal of Economic Behavior & Organization, Elsevier, vol. 215(C), pages 120-133.
    • Handle: RePEc:eee:jeborg:v:215:y:2023:i:c:p:120-133
    DOI: 10.1016/j.jebo.2023.08.027
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    References listed on IDEAS

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    More about this item

    Keywords

    Profit cap; Cournot oligopoly; Duopoly rule; Antitrust; Vaccine shortage;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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