Friday, May 11, 2018

Today's Economics Question

This has nothing in particular to do with patent remedies, but in a story on President Trump's speech today about lowering drug prices, the New York Times reports that "In trade negotiations, the White House wants to put pressure on other countries to increase the prices of brand-name drugs, with the expectation that pharmaceutical companies would then lower prices here at home." I've heard this sort of argument made many times over the years, and I've never understood it.  To be sure, one might argue, whether accurately or not, that other countries where governments control drug prices in one manner or another aren't paying their fair share for the R&D that goes into developing new drugs.  But if we assume that drug companies are rational economic actors, why would their ability to earn more revenue abroad impel them to lower domestic drug prices?  Standard economic theory predicts that firms, at least as a first approximation, charge what they believe to be the profit-maximizing price for their goods.  So if drug companies are, more or less, charging what the market will bear in the United States--maximizing their profits--why would anyone expect them to stop doing so, and voluntarily charge lower prices, just because they start earning more revenue abroad?

I largely buy into the insights of behavioral law and economics that people aren't always the rational economic calculators that old-school economics assumes them to be, but even so . . .


  1. The point makes more sense if you drop the “with the expectation...” part of it. I’ve read commentary complaining that comparably wealthy foreign countries aren’t paying their fair share of drug development costs. That was certainly true in the days of widespread compulsory licensing, but the point remains even if the lower prices in eg Canada are because of greater bargaining power or direct government control of prices (as by the Canadian Patented Medicine Prices Review Board). Of course, there is still the question of what the right prices are, but if you believe that US level prices are necessary for optimal drug development incentives, then it is the low foreign price levels as such (in comparably wealthy countries), rather than the cause, that is the problem.

  2. The "with the expectation" part is the part I am critiquing. I don't see why raising prices abroad would provide any incentive for drug companies to lower domestic U.S. prices.
    And while I am skeptical that "US level prices are necessary for optimal drug development incentives," the questions of what the appropriate price level is, and how R&D costs should be shared among the countries of the world from either a utilitarian or fairness perspective, are separate issues.