Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
• Profiteers Or Benevolent
• Monopoly Power As It Applies
• Important Questions
Profiteers or Benevolent Scientists?
• Spending on drugs accounts for 10%
of the more than $2 trillion health
• The question of advertising
• Ads for particular drugs
• These are not unexpected as new cures and
remedies are invented.
• Feel-good political ads
• These ads are seen as a means to forestall
price controls or regulations.
• A patent is a right granted by
government to an inventor to be
the exclusive seller on an invention
for a limited period of time.
• Patents motivate innovation with
the promise of monopoly profit for
a period of time.
• An Orphan Drug is one that treats
someone with a disease that afflicts
• The concern is that there is
insufficient potential demand to
• For orphan drugs the patent life is
extended by several years.
The Concern over High Prices
• Are prescription drug prices too high?
• The answer to many depends on the
impact of the disease.
• For “life or death” drugs price has been an
• The AIDS “cocktail” (a mix of drugs, used to fight
the disease) originally cost $14,000 per patient per
• For “quality of life” drugs it has been less of a
• Pepcid and Zantac (heartburn medications),
Seldane and then Claritan (seasonal allergy
medications) cost a great deal but have not raised
as much ethical concern.
The Impact of Monopoly Power
Monopoly vs. Perfect Competition
• Deadweight Loss (DWL) is
the loss in social welfare
associated with production
being too little or too great.
• In the case of monopoly,
production is too little and
prices are too high.
• Are prescription drugs expensive
necessities or relatively inexpensive
• Expensive Necessities?
• Prescription drug prices rose twice as fast as overall
• The prices are often more than ten times their
marginal production costs.
• Inexpensive godsends
• Drug treatments are typically much less than their
surgical alternatives. (Drugs that deal with blocked
arteries are less than a tenth the cost of bypass
• New quality of life drugs treat ailments for which
there are no surgical alternatives.
Why We Should Expect
Costs to be High
• Innovation costs
• Highly trained and highly paid personnel are
required to work on the therapies.
• Expensive equipment is necessary to aid the
• Uncertainty about success
• Most new therapies that make it out of the lab do
not make it through clinical testing.
• Time delay and opportunity cost
• Even when therapies are approved the revenue
stream begins more than a decade after the
invention costs have been incurred.
• The opportunity cost in terms of lost interest
must be counted as a cost as well.
The Cost Debate
• Consumer advocacy groups
contend that ad spending
now exceeds research
• Drug firms contend that this
• Consumer advocacy groups
are concerned that drug
companies are inventing
ailments to treat.
• e.g. Restless legs syndrome &
• The drug treats an ailment that
was not previously known to be
Are Price Controls an Answer?
• Price or profit controls in other countries
make it such that drug prices are much
higher in the U.S. than they are in other
• If the U.S. controlled prices or profits it
would eliminate the sole high profit market
for drugs thereby reducing their motivation
• Economists are generally against price or
profit limits for prescription drugs in the U.S.
Buying from Canada
• It is against the law for anyone to
resell drugs purchased oversees.
• Canadian and Mexican drug
prices are controlled by their
• It is much cheaper to buy drugs
in Canada or Mexico that it is in
• The Process
• Laboratory trials test the
effectiveness of drugs “in the testtube” and on animals.
• Small scale human testing is done to
• Large scale human testing is done to
determine effectiveness. This also
catches some safety issues.
Too Lax or Too Stringent
• Too Lax
• If drugs are approved that are later determined
to be unsafe (such as the weight loss drug FenPhen) the concern is that screening is too lax.
• Too Stringent
• If drugs that would have saved lives (or
otherwise helped people) are delayed in their
approval this is a loss as well.
• Economists evaluate the marginal cost of
increasing stringency against its marginal
• When a drug has been deemed to be
safe and effective and does not have an
adverse interaction with other drugs it
can go over-the-counter (sold without a
• It is not always in the consumer’s best
interest for a drug to go over-the-counter
• OTC drugs are not covered by insurance
• The out of pocket expense to consumers with
insurance can often be higher when a drug