Supply and Demand Mysteriously Explain Price Changes
By David Henderson
Not from the Onion.
When nearly 100 drugs became scarce between 2015 and 2016, their prices mysteriously increased more than twice as fast as their expected rate, an analysis recently published in the Annals of Internal Medicine reveals. The price hikes were highest if the pharmaceutical companies behind the drugs had little competition, the study also shows.
This is from Beth Mole, “When supplies of drugs run low, drug prices mysteriously rise, data show,” ars technica, September 24, 2018. I looked in vain for any hint of irony or sarcasm in the piece but failed to find it. Cut the use of the word “mysteriously” in both the headline and the paragraph quoted above, and it’s not bad reporting. What makes it bad reporting is that the author and possibly some of the people she quotes think that when the supply falls, the upward effect on price is mysterious. Of course, it’s not. Also notice that the there’s less of an effect on price when the supply of one medicine falls but there are other close competitors, just as one would expect.
And Ms. Mole deserves no criticism for simply reporting the policy recommendation of the authors of the study. They state:
If manufacturers are observed using shortages to increase prices, public payers could set payment caps for drugs under shortage and limit price increases to those predicted in the absence of a shortage.
If by “public” the authors mean “government” and if their goal is to cut government spending on health care, then their policy could make sense. The pay caps would cause drug sellers to sell to others who are willing to pay more and people insured by government insurers would do without or, at least, do with less. They shouldn’t kid themselves, though, if indeed they are kidding themselves, that this would be one effect of the policy they advocate.
Can we salvage their argument to show that such a price cap wouldn’t necessarily have the effect I claim? I think so, but it’s a stretch. Here’s how it would go. It’s a straightforward exercise to show that when a price cap below the monopoly price but above the marginal cost is imposed on a monopolist, output expands and there’s no shortage. But if the cap were imposed only on what government payers could pay, then it’s not straightforward. The effect is likely to be the one I claimed earlier: rationing to the government payers with less quantity to them than would have been provided without the price caps.
HT to someone on Facebook, but I’ve forgotten who.