http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/ Out of the crooked timber of humanity, no straight thing was ever made Fri, 25 May 2012 07:10:37 +0000 hourly 1 http://wordpress.org/?v=3.3.2 http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13809 Sebastian Holsclaw Fri, 23 Jan 2004 17:02:25 +0000 http://crookedtimber.org/wp/?p=920#comment-13809 As for AIDS drugs in Africa, you seem to want charity. If you want charity, why not do what normal charities do? Buy the product you wish to charitably donate, and then donate it. The US, Canada, France and Germany could certainly do that. They could probably even get the companies to lower their prices somewhat as a charitable/publicity impulse. The problem is that the government want to enforce their charitable instincts by forcing the company not to get paid for their drugs. In the long run that can't work. As for AIDS drugs in Africa, you seem to want charity. If you want charity, why not do what normal charities do? Buy the product you wish to charitably donate, and then donate it. The US, Canada, France and Germany could certainly do that. They could probably even get the companies to lower their prices somewhat as a charitable/publicity impulse. The problem is that the government want to enforce their charitable instincts by forcing the company not to get paid for their drugs. In the long run that can’t work.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13808 Doug Fri, 23 Jan 2004 10:05:17 +0000 http://crookedtimber.org/wp/?p=920#comment-13808 On the easy cases, I don't think that we do, at least not in principle. On the more difficult cases, I think that you are arguing for <i>a priori</i> restrictions on one type of actor - public actors - for ideological reasons, while allowing another type of actor - corporations - unlimited freedom to act, including enlisting other public actors to take up a company's private interests. (The point of departure on this thread was the involvement of the US Trade Representative in a pricing question between various US companies and a public buyer in Australia.) You seem to be arguing that it's ok to use US state power to assert private interests of pharmaceutical makers, but it's not ok to use Australian state power to protect the interests of broad swathes of the Australian population. This doesn't add up in my books. More broadly, I'm looking at these interactions as they actually take place. Everyone involved drives a hard bargain, and if you can succeed in placing the other side's resources out of bounds, you've given yourself a big leg up. I read your arguments as attempts to place public resources out of bounds, and here we're likely to continue to disagree. For example, the deals that are bringing AIDS drugs to Africa would never have happened under the approach that I think you are arguing for. Drug-makers would have insisted that first-world prices should hold, and public actors in sub-Saharan Africa would have had their paths to action (set prices, rescinding patents) blocked for ideological reasons. As Kleiman puts it in the piece that Sebastian cited: "How to pay for creating things that are, once created, very cheap to make in large numbers is a widespread problem. Given its growing importance, it probably deserves more attention than the standard intro micro text gives it. If the goods are priced way above marginal cost to allow a recapture of the initial investment, the result is that some consumers will choose to, or be forced to, forgo them. That forgone benefit represents sheer deadweight loss, or what non-economists call 'waste.' That's as true of a song or a software program or a microprocessor as it is of an AIDS drug, but the problem gets more exciting when the forgone benefit is staying alive." We can argue empirically about what happens in iterations of the interaction, or as public interests change (India's current policy on generics is a good example), but what we can't do is posit corporations acting with no knowledge of the public sphere against states that always act capriciously. On the easy cases, I don’t think that we do, at least not in principle. On the more difficult cases, I think that you are arguing for a priori restrictions on one type of actor – public actors – for ideological reasons, while allowing another type of actor – corporations – unlimited freedom to act, including enlisting other public actors to take up a company’s private interests. (The point of departure on this thread was the involvement of the US Trade Representative in a pricing question between various US companies and a public buyer in Australia.) You seem to be arguing that it’s ok to use US state power to assert private interests of pharmaceutical makers, but it’s not ok to use Australian state power to protect the interests of broad swathes of the Australian population. This doesn’t add up in my books. More broadly, I’m looking at these interactions as they actually take place. Everyone involved drives a hard bargain, and if you can succeed in placing the other side’s resources out of bounds, you’ve given yourself a big leg up. I read your arguments as attempts to place public resources out of bounds, and here we’re likely to continue to disagree. For example, the deals that are bringing AIDS drugs to Africa would never have happened under the approach that I think you are arguing for. Drug-makers would have insisted that first-world prices should hold, and public actors in sub-Saharan Africa would have had their paths to action (set prices, rescinding patents) blocked for ideological reasons. As Kleiman puts it in the piece that Sebastian cited: “How to pay for creating things that are, once created, very cheap to make in large numbers is a widespread problem. Given its growing importance, it probably deserves more attention than the standard intro micro text gives it. If the goods are priced way above marginal cost to allow a recapture of the initial investment, the result is that some consumers will choose to, or be forced to, forgo them. That forgone benefit represents sheer deadweight loss, or what non-economists call ‘waste.’ That’s as true of a song or a software program or a microprocessor as it is of an AIDS drug, but the problem gets more exciting when the forgone benefit is staying alive.” We can argue empirically about what happens in iterations of the interaction, or as public interests change (India’s current policy on generics is a good example), but what we can’t do is posit corporations acting with no knowledge of the public sphere against states that always act capriciously.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13807 Robert Lyman Thu, 22 Jan 2004 16:51:23 +0000 http://crookedtimber.org/wp/?p=920#comment-13807 Doug, I'm at a loss. I said in my first post that there was nothing wrong with volume purchasing power. I then went on to point out that state-run negotiations (as opposed to private insurance pools, for instance) have extortionate threats looming in the background and likely to be used, and in fact very often are used. But if the state does not use them, and acts as a pure volume purchaser, I don't have a problem with that. Do we even disagree? Doug, I’m at a loss. I said in my first post that there was nothing wrong with volume purchasing power. I then went on to point out that state-run negotiations (as opposed to private insurance pools, for instance) have extortionate threats looming in the background and likely to be used, and in fact very often are used. But if the state does not use them, and acts as a pure volume purchaser, I don’t have a problem with that. Do we even disagree?

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13806 Doug Thu, 22 Jan 2004 15:57:36 +0000 http://crookedtimber.org/wp/?p=920#comment-13806 <i>To begin with, I suppose you could defend price controls and patent-breaking as ?getting the best deal.? </i> I suppose I could, too, but I didn't. I suppose could knock down straw-men all day, if I went around attacking arguments that weren't actually made. Care to try again? To begin with, I suppose you could defend price controls and patent-breaking as ?getting the best deal.? I suppose I could, too, but I didn’t. I suppose could knock down straw-men all day, if I went around attacking arguments that weren’t actually made. Care to try again?

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13805 Robert Lyman Thu, 22 Jan 2004 14:59:10 +0000 http://crookedtimber.org/wp/?p=920#comment-13805 Doug, To begin with, I suppose you could defend price controls and patent-breaking as "getting the best deal." But you certainly <i>cannot</i> call it "volume purchasing power." When I go to Costco, I get a discout because I'm buying soy sauce 5 gallons at a time, not because I can threaten to forcibly lower their prices. I would consider the use of force or threats thereof to be an illegitimate bargaining tactic. And threatening to change laws are very similar (although not identical) to threats of force. If I offered to buy, say, your house, you probably would regard it as criminal if I threatened to do something to render your property interest worthless--if I had the power to zone you out of it, or if I could push through a law forbidding houses to be sold for more than 5% over purchase price, or if I could burn it down. Any such action (including legal changes) in the context of my attempted purchase would be, I think, extortionate in character, and might very well be illegal in many jurisdictions. It would also be pretty much identical to what governments do when they impose price controls or break patents. Doug, To begin with, I suppose you could defend price controls and patent-breaking as “getting the best deal.” But you certainly cannot call it “volume purchasing power.” When I go to Costco, I get a discout because I’m buying soy sauce 5 gallons at a time, not because I can threaten to forcibly lower their prices. I would consider the use of force or threats thereof to be an illegitimate bargaining tactic. And threatening to change laws are very similar (although not identical) to threats of force. If I offered to buy, say, your house, you probably would regard it as criminal if I threatened to do something to render your property interest worthless—if I had the power to zone you out of it, or if I could push through a law forbidding houses to be sold for more than 5% over purchase price, or if I could burn it down. Any such action (including legal changes) in the context of my attempted purchase would be, I think, extortionate in character, and might very well be illegal in many jurisdictions. It would also be pretty much identical to what governments do when they impose price controls or break patents.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13804 Doug Wed, 21 Jan 2004 21:03:06 +0000 http://crookedtimber.org/wp/?p=920#comment-13804 So Robert, you're saying that a state negotiator should get less than the best bargain possible for his/her constituents? Why exactly? Sebastian, I'm not sure how long your view of investors would survive prolonged contact with actual VCs, to say nothing of folks in distressed asset funds. Some are, indeed, the vultures that Antoni describes. (Though it's relevant to point out that vultures fill an important ecological niche.) Many others work very hard to take as little risk as possible. Portfolio theory is a handy tool in this endeavor; firing CEOs and closing startup companies is another. Some people with a lot of money do enjoy taking a lot of risk. They usually end with rather less money. (Thanks, though, for the pointer to the Kleiman post, in which on of his real experts makes the observation, "Bottom line: you cannot conduct your analysis on purely theoretical grounds; you need some serious cost-benefit data.") Anyway, the point of the original post is that a significant chunk of pharmaceutical research is now structured around the idea that Americans (or, more accurately, American insurance companies, HMOs and government buyers) will be willing to pay much more for drugs than other developed countries for an indefinite period. Is this a desirable outcome? For whom? So Robert, you’re saying that a state negotiator should get less than the best bargain possible for his/her constituents? Why exactly? Sebastian, I’m not sure how long your view of investors would survive prolonged contact with actual VCs, to say nothing of folks in distressed asset funds. Some are, indeed, the vultures that Antoni describes. (Though it’s relevant to point out that vultures fill an important ecological niche.) Many others work very hard to take as little risk as possible. Portfolio theory is a handy tool in this endeavor; firing CEOs and closing startup companies is another. Some people with a lot of money do enjoy taking a lot of risk. They usually end with rather less money. (Thanks, though, for the pointer to the Kleiman post, in which on of his real experts makes the observation, “Bottom line: you cannot conduct your analysis on purely theoretical grounds; you need some serious cost-benefit data.”) Anyway, the point of the original post is that a significant chunk of pharmaceutical research is now structured around the idea that Americans (or, more accurately, American insurance companies, HMOs and government buyers) will be willing to pay much more for drugs than other developed countries for an indefinite period. Is this a desirable outcome? For whom?

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13803 Sebastian Holsclaw Wed, 21 Jan 2004 18:11:45 +0000 http://crookedtimber.org/wp/?p=920#comment-13803 If you want to look more deeply into the issue I would suggest perusing Derek Lowe's <a> website </a> or this comprehensive overview (is that an oxymoron) by <a href="http://www.markarkleiman.com/archives/_/2002/09/paying_for_pharmaceutical_development.php"> Mark A. Kleiman </a>. I also note that Brad DeLong agrees that squeezing drug companies is a poor choice <a href="http://www.j-bradford-delong.net/movable_type/archives/000867.html"> here </a>. He isn't at all a conservative pundit. If you want to look more deeply into the issue I would suggest perusing Derek Lowe’s website or this comprehensive overview (is that an oxymoron) by Mark A. Kleiman . I also note that Brad DeLong agrees that squeezing drug companies is a poor choice here . He isn’t at all a conservative pundit.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13802 Sebastian Holsclaw Wed, 21 Jan 2004 17:32:38 +0000 http://crookedtimber.org/wp/?p=920#comment-13802 Antoni Jaume, you confuse free-riding with investing. Taking a risk with money and other forms of capital in the hope of producing useful research is investing. You could put the money in a fairly sure thing like Wal-Mart or internet porn, or California rental units, but instead you take a huge risk on pharmaceuticals. You earn the money by taking the risk on something highly useful but very likely not to pan out. That is called investing. Free riding involves letting someone else do all the work <b> and take all the risk </b> and then swooping in and using the discovery later. (See for instance French demands that the US 'share' military technology with the EU.) Investors in a 7-10 year project are the precise opposite of free riders. But I'm glad you made the mistake, because it is a common confusion among leftists to mistake the productive investors they despise with the unproductive free riders that they encourage. Antoni Jaume, you confuse free-riding with investing. Taking a risk with money and other forms of capital in the hope of producing useful research is investing. You could put the money in a fairly sure thing like Wal-Mart or internet porn, or California rental units, but instead you take a huge risk on pharmaceuticals. You earn the money by taking the risk on something highly useful but very likely not to pan out. That is called investing. Free riding involves letting someone else do all the work and take all the risk and then swooping in and using the discovery later. (See for instance French demands that the US ‘share’ military technology with the EU.) Investors in a 7-10 year project are the precise opposite of free riders. But I’m glad you made the mistake, because it is a common confusion among leftists to mistake the productive investors they despise with the unproductive free riders that they encourage.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13801 Antoni Jaume Wed, 21 Jan 2004 16:15:29 +0000 http://crookedtimber.org/wp/?p=920#comment-13801 Doug, what you describe is that self-called investors are free riding on other peoples works. It is not that they start from really nothing, they do not make the inversion of rising a bunch of baby to adulthood, giving them all what is needed until some of them happen to do something useful. Rather they prey on people, on other companies, that have done such an effort, hoping that they are exhausted, in order to prey on their work. The USA market is simply another market, the fact that their laws are stacked against their people in favor of big money is their problem, do not try to pester us with such madness. DSW Doug, what you describe is that self-called investors are free riding on other peoples works. It is not that they start from really nothing, they do not make the inversion of rising a bunch of baby to adulthood, giving them all what is needed until some of them happen to do something useful. Rather they prey on people, on other companies, that have done such an effort, hoping that they are exhausted, in order to prey on their work. The USA market is simply another market, the fact that their laws are stacked against their people in favor of big money is their problem, do not try to pester us with such madness. DSW

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13800 Robert Lyman Wed, 21 Jan 2004 15:50:43 +0000 http://crookedtimber.org/wp/?p=920#comment-13800 Doug, Nothing's wrong with volume purchasing power. But when states do it, they have more than just the threat to walk away: they have price controls and patent laws. The temptation on the part of legislators to uses these tools, which are not available to Wal-Mart, is rather great. After all, the taxpayers are not, for the most part, biotech investors. Doug, Nothing’s wrong with volume purchasing power. But when states do it, they have more than just the threat to walk away: they have price controls and patent laws. The temptation on the part of legislators to uses these tools, which are not available to Wal-Mart, is rather great. After all, the taxpayers are not, for the most part, biotech investors.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13799 Doug Wed, 21 Jan 2004 13:34:16 +0000 http://crookedtimber.org/wp/?p=920#comment-13799 Steps boldly into the middle of the road, aware of traffic in both directions: Sebastian, and other free marketeers, why shouldn't large buyers use their leverage to get better prices? Wal-Mart gets good prices from P&G; Barnes & Noble gets good prices from Random House. Why shouldn't Australia get good prices from Merck? (Maybe not great prices; it's only got <a href="http://www.cia.gov/cia/publications/factbook/geos/as.html">20 million</a> customers after all, but good prices.) For the other side, here's a good indicator that free-riding is more than an accusation: If you're building a drug discovery company in, say Europe's second largest biotech cluster in Munich, and your company is doing well enough on the scientific side, pretty soon you will have to answer the question "What are your plans for the American market?" The people usually posing this question will be your investors, and the time they will usually be posing it is when they are deciding whether or not to make an additional investment. If you don't have plans for the American market, your chances of getting the investment you need to bring the drugs your are investigating out of the lab and onto the shelf, are very low indeed. That is to say, even if you are based in Europe, have mostly European personnel and are drawing on European investors, the presumption remains that seven to ten years down the road, when your drug hits the market, you will need to make big money in America to justify the investment that got you there. That's not just some arbitrary government regulation that could be changed. That's a deep-rooted market perception: Europe will be free-riding on American drug prices for the foreseeable future. My questions, then: Is this desirable? At what value should we take European efforts to hinder American (public or private) moves to change this situation? Time Magazine <a href="http://www.time.com/time/europe/html/040119/brain/story.html">offers</a> facts, figures and anecdotes on a related issue. Steps boldly into the middle of the road, aware of traffic in both directions: Sebastian, and other free marketeers, why shouldn’t large buyers use their leverage to get better prices? Wal-Mart gets good prices from P&G; Barnes & Noble gets good prices from Random House. Why shouldn’t Australia get good prices from Merck? (Maybe not great prices; it’s only got 20 million customers after all, but good prices.) For the other side, here’s a good indicator that free-riding is more than an accusation: If you’re building a drug discovery company in, say Europe’s second largest biotech cluster in Munich, and your company is doing well enough on the scientific side, pretty soon you will have to answer the question “What are your plans for the American market?” The people usually posing this question will be your investors, and the time they will usually be posing it is when they are deciding whether or not to make an additional investment. If you don’t have plans for the American market, your chances of getting the investment you need to bring the drugs your are investigating out of the lab and onto the shelf, are very low indeed. That is to say, even if you are based in Europe, have mostly European personnel and are drawing on European investors, the presumption remains that seven to ten years down the road, when your drug hits the market, you will need to make big money in America to justify the investment that got you there. That’s not just some arbitrary government regulation that could be changed. That’s a deep-rooted market perception: Europe will be free-riding on American drug prices for the foreseeable future. My questions, then: Is this desirable? At what value should we take European efforts to hinder American (public or private) moves to change this situation? Time Magazine offers facts, figures and anecdotes on a related issue.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13798 Ali Wed, 21 Jan 2004 12:37:44 +0000 http://crookedtimber.org/wp/?p=920#comment-13798 <i>Ok that is easy. Drug prices abroad are (especially in say, Canada) priced near the unit price of physcially creating the pill. That price does not cover most of the billions of dollars of research costs for that pill, nor does it cover any of the research costs for failed pills. Therefore the price does not cover the costs and the price is too low.</i> Convincing if true. Can you source this claim? A comparison of foreign prices for protected drugs vs US generic prices post-expiration for those same drugs would suffice. I'm sure such data exists somewhere. Ok that is easy. Drug prices abroad are (especially in say, Canada) priced near the unit price of physcially creating the pill. That price does not cover most of the billions of dollars of research costs for that pill, nor does it cover any of the research costs for failed pills. Therefore the price does not cover the costs and the price is too low. Convincing if true. Can you source this claim? A comparison of foreign prices for protected drugs vs US generic prices post-expiration for those same drugs would suffice. I’m sure such data exists somewhere.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13797 Sebastian Holsclaw Wed, 21 Jan 2004 07:40:49 +0000 http://crookedtimber.org/wp/?p=920#comment-13797 I don't confuse corporations with non-profit research charities. Non-profit research charities don't typically discover and research as many important drugs. Patents on old drugs exist for a relatively short period of time. A drug company will not survive if it fails to do significant amounts of research. Therefore it does research. No charity impulse need be assumed. I don’t confuse corporations with non-profit research charities. Non-profit research charities don’t typically discover and research as many important drugs. Patents on old drugs exist for a relatively short period of time. A drug company will not survive if it fails to do significant amounts of research. Therefore it does research. No charity impulse need be assumed.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13796 Sebastian Holsclaw Wed, 21 Jan 2004 07:35:48 +0000 http://crookedtimber.org/wp/?p=920#comment-13796 So far as I know, the location of a companies incorporation has little to do with the place where it makes the profit which pays for its research. So far as I know, the location of a companies incorporation has little to do with the place where it makes the profit which pays for its research.

]]> http://crookedtimber.org/2004/01/20/drug-prices-and-the-logic-of-collective-action-ii/comment-page-1/#comment-13795 Marcus Stanley Wed, 21 Jan 2004 04:30:19 +0000 http://crookedtimber.org/wp/?p=920#comment-13795 Ummm...many of the worlds largest drug companies are European companies. Astra, Glaxo SmithKline, Rhone Poulenc, etc. Last I heard they did research, and lots of it too. The U.S. leadership in drug research has a lot to do with the amount of government money we pour into it through NIH. As for the effect of high U.S. prices on drug company research...maybe, maybe not. Glaxo Smithkline made gross pretax profits of over 30% last year (that's a *very high* profit margin BTW, higher than competitive companies in unregulated markets tend to make). How much of the higher drug prices go into research and how much straight into stockholders pockets is an open question that you do not know the answer to. Your argument seems to assume that drug companies function as non-profit research charities of some sort. Ummm…many of the worlds largest drug companies are European companies. Astra, Glaxo SmithKline, Rhone Poulenc, etc. Last I heard they did research, and lots of it too. The U.S. leadership in drug research has a lot to do with the amount of government money we pour into it through NIH. As for the effect of high U.S. prices on drug company research…maybe, maybe not. Glaxo Smithkline made gross pretax profits of over 30% last year (that’s a very high profit margin BTW, higher than competitive companies in unregulated markets tend to make). How much of the higher drug prices go into research and how much straight into stockholders pockets is an open question that you do not know the answer to. Your argument seems to assume that drug companies function as non-profit research charities of some sort.

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