TOOLS FOR STUDYING INDUSTRY ECONOMICS

Three tools for studying the economic characteristics of an industry are (1) value chain

analysis, (2) Porter’s five forces classification framework, and (3) an economic attributes

framework. The microeconomics literature suggests other analytical frameworks as well.

Value Chain Analysis

The value chain for an industry sets forth the sequence or chain of activities involved in the

creation, manufacture, and distribution of its products and services. Exhibit 1.4 portrays a

value chain for the pharmaceutical industry. Pharmaceutical companies invest in research

and development to discover and develop new drugs. When promising drugs emerge, a

lengthy drug approval process begins. Estimates suggest that it takes seven to ten years and

almost $1 billion to discover and obtain approval of new drugs. To expedite the approval

process, reduce costs, and permit their scientists to devote energies to the more creative