Drug Re-importation, Fallacies II

In an earlier post I attempted to show that, under certain conditions detailed there, a monopoly supplier of patented prescription drugs does no injury to US consumers when it sells into isolated foreign markets at lower prices, independent of whether those prices are set by a free market or whether they are controlled by a government. The US free market (assumed contrary to fact) price of the drugs is not affected as it results from the manufacturer serving his self interest and providing the consumer drugs at the price which maximizes both total revenue and current, non-accounting profits.

In addition, I attempted to show that the years of development costs also have no impact on pricing as they are sunk costs. The development costs, if projected to be sufficiently high, would have aborted the project long ago, but if the development is actually carried through to production, the market price is adjusted to a level that is estimated to maximize total revenue, independent of the actual development cost.

In addition to the fallacies of US prices being driven up by development costs and by low prices in foreign isolated markets, we can add a third fallacy.

Many people believe that the often large sums spent on advertising are also partly responsible for increased drug prices in the US market. This would seem to be plausible, but in fact is not so, in general.

The purpose of advertising is to increase unit demand and total revenues. If the advertising were not expected to result in addtional revenues that exceeded the advertising cost, it would not logically be undertaken.

For the purposes of analysis, consider the new demand created by advertising separately from the original demand. This separate new demand will have its own projected demand/price curve and its own revenue-maximizing price. There is no particular reason to believe that this price will be above, below, or the same as the original revenue-maximizing price. If this is so, then there is no reason to believe that when the new and original demands are combined, that the price that is expected to maximize the revenue from the summed demand will be in any necessary relationship to the original price. In particular, there is no reason to expect that the result of advertising will be to increase the final price.

In summary, contrary to popular belief, neither development nor advertising costs, nor the sale of drugs in isolated foreign markets, have any tendency to increase the prices of monopoly drugs in a postulated US free market supplied with a zero marginal cost. Nor do they injure US consumers in any way.

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"In summary, contrary to

"In summary, contrary to popular belief, neither development nor advertising costs, nor the sale of drugs in isolated foreign markets, have any tendency to increase the prices of monopoly drugs in a postulated US free market supplied with a zero marginal cost. Nor do they injure US consumers in any way."

In the context of re-importation foreign markets are not isolated.

John T, In the context of

John T,

In the context of re-importation foreign markets are not isolated.

If the drug makers want the foreign markets to be isolated, they can make it so by writing and enforcing sufficiently draconian sales and distribution contracts with retroactive recourse. If doing so is found to be cost inefficient, then they can simply cut off all sales and write off the market.

Regards, Don

But if drug manufacturers

But if drug manufacturers push too hard, they know that most of these companies will simply make their own version of these drugs.

Oops, that should read "most

Oops, that should read "most of these countries".

Micha, You'll have to come

Micha,

You'll have to come with both a more serious threat and more significant consequences.

If the Cali Drug Cartel decided to go into counterfeit prescription drug manufacture, if it isn't already there, that would be something to be concerned about, but only because of the ineffectiveness of civil and legal restraints.

I can't find my way clear to believe that Canada is going to take up drug manufacturing because Merck won't give the Canadian government a 90% discount instead of 80%. Unless the Canadian government feels that it can produce all of the drugs that Canada uses, it runs a real risk of internally induced regime change.

The drug companies have no possibility of controlling how foreign governments act. All they can do is make rational financial decisions. If certain foreign markets must cut off, so be it. If the US market is at risk from counterfeit smuggled drugs, the agreements that are reached or not reached with foreign governments are of little import.

This is a general issue, not limited to prescription or patented drugs. Does Canada smuggle counterfeit Coca Cola into the US? Maybe they do and they keep it quiet. Name any item that a government produces and successfully smuggles into the US. Probably illegal drugs are one of the few things, and they are only smuggled in because of the profits that prohibition makes possible.

In theory, the prices on prescription drugs look high, but the level of supply that proceeds through highly discounted channels makes the idea of A market price of limited validity.

All along, my argument is that isolated foreign sales do not negatively impact the US consumer, independent as to whether the manufacturer decides to sell into a given market or not and also independent as to what the price is that he decides to do so.

Any scenarios that would impact the US consumer are solicited.

Regards, Don

Your argument that drug

Your argument that drug companies should have the right to waste millions on TV ads is totally wrong, and makes it very obvious why consumers should not be paying for drugs, but they should be subsidized by the government, eliminating all the money wasted on TV ads. Charities raise money to give for drug research, and these companies go and waste it to put talking heads on TV? It is completely unconsciable. Once developed, drugs cost virtually nothing to produce. Any time a person who needs a drug and does not get it, there is a waste of the resources used for drug research, because it would cost virtually nothing to provide them the benefit of that drug. Even in the US, there are as many people who go without any drug as those who get it, and if you look worldwide, there may be 20 times as many who go without as get it. This is a huge loss to society. In an efficient society, suppliers must not waste money on TV advertising, and items that have zero marginal cost like drugs must be subsidized by the government, and given away free. It is well documented that if a good is not being sold at its marginal cost, resources are being wasted.

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