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It's shocking how confident people are in their understanding of economics when they clearly have never read a book on the subject or taken a 101 course on it.

It's shocking how confident people are in their understanding of economics when they clearly have never read a book on the subject or taken a 101 course on it. People have some kind of instinct for how much money is "too much" in different contexts and they fully believe they are right without any external frame of reference. Ask them what the "correct" margin should be based on and they'll say something like "the cost plus a little bit more to cover overhead." No understanding of supply/demand whatsoever.

mhuffman 9y ago
I assume that your studies in economics identified what you are referring to as "cost-plus" pricing...which is not how any drug is priced. At the point of sales, R&D is a sunk cost and is not part of the pricing strategy, in most big modern companies. Companies price their product to maximize profit. That is not always the highest price they could charge, but is a function of total profits.
Dylan16807 9y ago
> Ask them what the "correct" margin should be based on and they'll say something like "the cost plus a little bit more to cover overhead." No understanding of supply/demand whatsoever. Are you saying that's not the correct price in a competitive market? After accounting for all costs, of course. Maybe you should read those people as saying "this market is lacking in competition to make prices reasonable".
- logfromblammo 9y ago
  My primate sense of fairness says that charging 100% of costs is actually a form of charity, 105% of costs is hyper-competitive, 110% of costs is quite respectable and meritorious, whereas 150% of costs is getting to be overly ambitious. 10000% of costs is, quite simply, asking for someone to put a shiv in your kidney. The only way to achieve such margins is by literally suppressing all competition with armed force, with an unquenchable, non-substitutable demand. In the case of pharmaceuticals, the feds provide that force.
  - saas_sam 9y ago
    Feds provide force sometimes, but other times it's just a matter of time. When you produce a new product or service, you have a 'monopoly' on it until other people move in. Thus, margins start high and quickly lower even in a maximally competitive environment. Just wanted to share that concept in case others didn't make that connection!
  - aisofteng 9y ago
    That primate is sense is just that - namely, primitive.
_jal 9y ago
It is shocking how many people will ignore the fact that health care and pharma in the U.S. are nothing like the toy models taught in econ 101, or an actual free market for that matter, but pretend that they are in order to defend rent seeking.
- saas_sam 9y ago
  I haven't seen anyone arguing that health care in the U.S. is in anything resembling a free market... Have you actually ever seen that, or did your fingers/heart get ahead of your brain there? ;-)
  - Dylan16807 9y ago
    Your first comment is clearly calling those toy models (of supply/demand in free markets and econ 101) relevant to this situation, which is healthcare in the US. Don't play games with wording. Especially when you can remove the clause containing the words "free market" without changing the meaning of the comment. "It is shocking how many people will ignore the fact that health care and pharma in the U.S. are nothing like the toy models taught in econ 101, but pretend that they are in order to defend rent seeking."
rocqua 9y ago
There is a difference between the price that balances supply and demand, and the price that is 'fair' to ask. Specifically, when demand is very inelastic because things are plain necessary the balance point is no longer fair. Normally, the balance point is the fair point. By making it cheaper, you get people who don't need it still buying it, leaving no supply for others that do need it. At the same time, making it more expensive leaves people who need it not being able to get it. This reasoning is why we say the market price and fair price coincide. This breaks down when demand is inelastic. (It also breaks down when income inequality gets to be huge). Specifically, when there are no people that want something but don't need it, the argument breaks down. In this situation, the market price is called price gouging. There are some cases where responding to the market makes sense. I.e. when there is a flood incoming, make flashlights and batteries a bit more expensive to discourage hoarding and encourage more supply. Don't charge the market price mark-up of 10x though.
imploder 9y ago
Yeah, dude, totally! Like, people are stupid for not trying to price gouge every stranger they encounter. Who doesn't think like that? If demand is high, it's the perfect excuse to exploit people. Why would anyone try to rationalize a reasonable exchange, when they can rip desperate people off?

mhuffman 9y ago

I assume that your studies in economics identified what you are referring to as "cost-plus" pricing...which is not how any drug is priced. At the point of sales, R&D is a sunk cost and is not part of the pricing strategy, in most big modern companies. Companies price their product to maximize profit. That is not always the highest price they could charge, but is a function of total profits.

Dylan16807 9y ago

> Ask them what the "correct" margin should be based on and they'll say something like "the cost plus a little bit more to cover overhead." No understanding of supply/demand whatsoever. Are you saying that's not the correct price in a competitive market? After accounting for all costs, of course. Maybe you should read those people as saying "this market is lacking in competition to make prices reasonable".

logfromblammo 9y ago
My primate sense of fairness says that charging 100% of costs is actually a form of charity, 105% of costs is hyper-competitive, 110% of costs is quite respectable and meritorious, whereas 150% of costs is getting to be overly ambitious. 10000% of costs is, quite simply, asking for someone to put a shiv in your kidney. The only way to achieve such margins is by literally suppressing all competition with armed force, with an unquenchable, non-substitutable demand. In the case of pharmaceuticals, the feds provide that force.
- saas_sam 9y ago
  Feds provide force sometimes, but other times it's just a matter of time. When you produce a new product or service, you have a 'monopoly' on it until other people move in. Thus, margins start high and quickly lower even in a maximally competitive environment. Just wanted to share that concept in case others didn't make that connection!
- aisofteng 9y ago
  That primate is sense is just that - namely, primitive.

_jal 9y ago

It is shocking how many people will ignore the fact that health care and pharma in the U.S. are nothing like the toy models taught in econ 101, or an actual free market for that matter, but pretend that they are in order to defend rent seeking.

saas_sam 9y ago
I haven't seen anyone arguing that health care in the U.S. is in anything resembling a free market... Have you actually ever seen that, or did your fingers/heart get ahead of your brain there? ;-)
- Dylan16807 9y ago
  Your first comment is clearly calling those toy models (of supply/demand in free markets and econ 101) relevant to this situation, which is healthcare in the US. Don't play games with wording. Especially when you can remove the clause containing the words "free market" without changing the meaning of the comment. "It is shocking how many people will ignore the fact that health care and pharma in the U.S. are nothing like the toy models taught in econ 101, but pretend that they are in order to defend rent seeking."

rocqua 9y ago

There is a difference between the price that balances supply and demand, and the price that is 'fair' to ask. Specifically, when demand is very inelastic because things are plain necessary the balance point is no longer fair. Normally, the balance point is the fair point. By making it cheaper, you get people who don't need it still buying it, leaving no supply for others that do need it. At the same time, making it more expensive leaves people who need it not being able to get it. This reasoning is why we say the market price and fair price coincide. This breaks down when demand is inelastic. (It also breaks down when income inequality gets to be huge). Specifically, when there are no people that want something but don't need it, the argument breaks down. In this situation, the market price is called price gouging. There are some cases where responding to the market makes sense. I.e. when there is a flood incoming, make flashlights and batteries a bit more expensive to discourage hoarding and encourage more supply. Don't charge the market price mark-up of 10x though.

imploder 9y ago

Yeah, dude, totally! Like, people are stupid for not trying to price gouge every stranger they encounter. Who doesn't think like that? If demand is high, it's the perfect excuse to exploit people. Why would anyone try to rationalize a reasonable exchange, when they can rip desperate people off?