Drug prices and the logic of collective action II

“Secondly, I am still, and perhaps will always be, amazed at people who style themselves as free-market supporters but don’t mind any amount of market manipulation or extraction of monopoly rents as long as they’re done by large private firms, or by the government on behalf of large private firms.”

You’ll have to give specfic examples of what you are talking about. It is drawn so broadly that even I could agree with you, and I never do. :)

As for: “But it still seems to me that you can’t accuse the rest of the world of free-riding on US R&D until you’ve established whether a)drug prices in the US are artificially high or b)prices abroad are artificially low.”

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. Any further objections?

Oh, wait I can forsee one further objection. If the prices are artifically low, why doesn’t the pharmaceutical company just pull out of the market? Answer, because if they do, the country (say Canada)threatens to break the patent and allows a competitor (with none of the research costs expended)to make money on the drug for free. The company figures that it might as well make the small per-unit profit rather than none so long as they can still make up the research costs elsewhere . This has to do with sunk costs. The research is already done and paid for, you now have to try to get that money back somehow. But don’t think for a second that investments in new research will continue if the ability to make money on it is dramatically curtailed. And dramatically curtailed is precisely what we are talking about here.

Yes the free market is a means not an ends. But unfortunately for the previous discussions on this topic here, governments are not good at designing systems to regularly produce useful pharamaceuticals.

Sebastian: leaving aside the question of your evidence (how do you know the price is at physical production cost?), your point is completely irrelevant to whether U.S. drug prices are too high. It would in fact be surprising if U.S. prices were the “right” free market prices, since firms with a grant of monopoly power often charge a substantial markup over true average costs (in this case including research costs).

Keep in mind that there *is* competition in the drug market. It’s just that the competition usually takes the form of competing drugs (how many statins are out there?) rather than between different companies making the same drug. No one has a monopoly on “AIDS medication,” or anything like that.

Not to mention, any drug that was available in the mid-80s is now available as a generic for a much lower price than any name-brand drug. It’s not like medical technology was in some kind of dark age then; if you don’t want to deal with the big pharma, no one is making you do so. And indeed, if other countries want to encourage their own pharmaceutical industries to develop, nothing is stopping them from doing so. New biotech companies start up in the US practically every day; it’s not like there are huge barriers to entry in the drug market.

Yet strangely, we don’t seem to see this happening. Why not?

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.

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.

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.

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.

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?

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?

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.