Pfizer the Cost Structure for Case Study

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The other considerations weight more heavily. There are likely some cost savings due to economies of scale, although that would be difficult to test for in a product such as Viagra, which has enjoyed strong sales its entire existence, and for which specific production cost data is unavailable.

With respect to Viagra, Pfizer is operating in a constant returns to scale environment. The market for Viagra has been slow growing in recent years, and at a high level. The changes in demand for Viagra are of such small size that they are unlikely to have a significant impact on production costs. The primary impact of economies of scale is with respect to the manner in which drug companies exploit the high margins they can earn on blockbuster drugs to finance their operations. Even with this, the contribution that these drugs make is based less on the ability of the company to control production costs by building economies of scale than it is on the company's patent protections which allow them to exploit low price elasticity of demand.

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Economies of scope are more significant for the pharmaceutical industry. A product such as Viagra is used to lower the average development cost of all drugs. Production cost in this scenario is largely irrelevant, but the primary cost driver of development is borne by one successful product such as Viagra, but spread over several other products that did not make it to market. Indeed, faced with the loss of patent protection of Viagra, Lipitor and other major income earners, Pfizer has had to lower its R&D costs (Goldstein, 2010) because it is unable to take advantage of economies of scope without the high revenues that patent protection earns marketable products like Viagra.

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