Thursday, July 18, 2002

economic pet peeve Send this entry to: Del.icio.us Spurl Ma.gnolia Digg Newsvine Reddit

economic pet peeve Ramesh Ponnuru, writing on prescription drug re-importation, commits one of my economic pet peeves:
But if re-importation were allowed, wouldn't it make more sense for the drug companies to stop selling drugs in Canada until it allowed prices to rise? That way, they could still at least make a profit in the United States. During the interim, however, one would expect prices here to rise, not fall. As it stands, Canadian prices cover the cost of production and a little bit extra and that little bit extra lightens the load of the companies' R&D on Americans.
As far as I'm concerned, this makes no sense. Imagine you run a Drugco, and you're deciding what the US price should be for your new drug. Do you (a) figure out what price will bring you the most profits and charge that price? (b) figure out what price will bring you the most profits and then charge a lower price, reasoning that "Canadian profits are lightening the load"? To argue as Ponnuru does (and as so many others do), you'd have to believe the second. And while I suppose it's conceivable that some company might do business that way, it strikes me as highly unlikely. It's certainly not what I'd "expect" to find. And if Drugcos are already choosing path (a), there's no reason for the loss of the Canadian market to change the US price at all, since it's already chosen to maximize profits.







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