Regulation and Industry Structure
Milton Friedman argues that the drug-approval process is the problem.
On the drug side, what seems to me to be the most serious situation is the extent to which the Food and Drug Administration makes it extremely expensive to produce a drug, and you can understand why. The FDA is required by law to certify the safety and the effectiveness of new drugs that are offered for sale on the market. Now, you’re an employee of the FDA. If you turn down a drug which might’ve saved millions of lives, nobody’s going to know about those millions of lives, nothing’s going to happen to you. If you on the other hand approve a drug which turns out to have bad effects, the classic case is one of Thalidomide, you’re going to be the subject of reproach, your job’s going to be lost, etc.
…In my opinion, the one big development you could make would be to go back to what the situation was before, to have the FDA certify safety, which itself raises difficulties. But not efficacy. And let the market itself work in determining efficacy. And that would change the situation altogether. It would lead to a much larger number of small pharmaceutical companies, it would lead to much more innovation and development and to much lower prices for pharmaceutical drugs.
The symbiosis between heavy-handed regulation and big business, to the detriment of small firms, is also the subect of a post by David Masten.
We have a marginal company that faces a regulatory burden and needs to make a profit. They have accepted that the “people” want regulation, so they are going to be “reasonable” and “responsible” corporate citizens and help develop regulation. Preferably regulation that costs more to the competition than themselves. Do you see where I am heading? By actively working for regulation they can get good PR while locking out competition. As a bonus, the quality of product is fixed at the level specified by the regulation, and the company has reduced costs associated with legal claims about the safety of their product.
The end result is a huge company that would not be able to exist at all in a free market that is now able to dominate the market because of regulation. This has occured in automobiles, banking, insurance, and aviation amongst others. Big business requires big government to exist.
Actually, there are many small businesses that have become reconciled to and dependent on regulation. Real estate brokers, pharmacists, doctors, and others use licensing rules to capture rents.
For Discussion. What other articles have you seen on the role played by regulation in affecting industry structure?