4 ms·

I think they are tacitly colluding. To price your drug, start with the price that a monopoly would charge. If you are the 2nd entrant, copy the first entrant's

I think they are tacitly colluding. To price your drug, start with the price that a monopoly would charge. If you are the 2nd entrant, copy the first entrant's price. Adjust the price slightly depending on the relative differences. If your drug is easier to administer, has fewer side effects, is more effective, charge a slightly higher price, or vice-versa. Is your market share lower? Lower your price slightly. Higher? Raise your price slightly. Aim for 1/N market share, and punish any firm that tries to achieve an "unfair" market share. Remember insurance will pay almost any price, so don't get too greedy and spoil it for everyone.

pfdietz 2y ago
> Higher? Raise your price slightly. And that's the part that makes no sense. Why would any individual competitor there aim for 1/N market share, rather than as much market share as they can get? On the margin, the incentive is always to reduce price enough to take market share from one or more of the others.
- credit_guy 2y ago
  Not OP, but allow me to chime in. What you say makes perfect sense, but the healthcare market has serious frictions. A lot of people pay only a fraction of the sticker price because their health insurance pays the rest. Let's say Eli Lilly charges $1000 per pen and the user pays $25 (not an atypical number). If Eli Lilly cuts the price by 20%, the user will see monthly savings of $5. The insurance company will pay $195 less, and in time maybe, because of the competition, might reduce premiums. Most likely not, because this is just a tiny component of a humongous basket of goods and services that eventually drives the setting of the premium. Of course, a lot of users pay sticker price, and those will absolutely like to pay $200 less per month. But the marginal profit and loss equation for Eli Lilly will show a massive loss: they get a 20% loss on all their current paying users but start seeing some profit on the new users attracted by the lower price. Let's say the cost to manufacture one pen is $200 (including the capital amortization) so at $800 the profit is 300%. But the new users are too few, so overall they end up losing money. And this equation works at any other discount price, at 5%, at 10%, at 50%.
  - pfdietz 2y ago
    Such friction can reduce the rate at which the equilibrium is reached, but they can't prevent it. And I will note that insurance companies have incentive to adjust things to drive patients to use the cheaper options. We see this all the time in prescription plans that motivate use of generic drugs and cheaper pharmacies, and even coerce doctors to use cheaper, older treatments before newer treatments with superior efficacy (this has been happening in oncology, for example.) If they are willing to do that in the brutal competition to cut costs to attract people to their plans, they will certainly be willing to apply the screws to reduce GLP-1 agonist pricing.
    - avidiax 2y ago
      Generics are not the competition that you think they are. Drug companies have been paying the makers of generic drugs to not bring generics to the market. Insurance companies don't have the incentives that you think they do. If prescription drugs in general become more expensive, they simply raise the price of insurance. And if they are limited to taking X% of the rate as administrative fees, then this means that revenue increases. If the market followed the Chicago model as you think it does, how does the price of insulin increase? Why are drug prices increasing faster than inflation? https://www.ftc.gov/news-events/topics/competition-enforcement/pay-delay https://www.ftc.gov/news-events/topics/competition-enforceme...

pfdietz 2y ago

> Higher? Raise your price slightly. And that's the part that makes no sense. Why would any individual competitor there aim for 1/N market share, rather than as much market share as they can get? On the margin, the incentive is always to reduce price enough to take market share from one or more of the others.

credit_guy 2y ago
Not OP, but allow me to chime in. What you say makes perfect sense, but the healthcare market has serious frictions. A lot of people pay only a fraction of the sticker price because their health insurance pays the rest. Let's say Eli Lilly charges $1000 per pen and the user pays $25 (not an atypical number). If Eli Lilly cuts the price by 20%, the user will see monthly savings of $5. The insurance company will pay $195 less, and in time maybe, because of the competition, might reduce premiums. Most likely not, because this is just a tiny component of a humongous basket of goods and services that eventually drives the setting of the premium. Of course, a lot of users pay sticker price, and those will absolutely like to pay $200 less per month. But the marginal profit and loss equation for Eli Lilly will show a massive loss: they get a 20% loss on all their current paying users but start seeing some profit on the new users attracted by the lower price. Let's say the cost to manufacture one pen is $200 (including the capital amortization) so at $800 the profit is 300%. But the new users are too few, so overall they end up losing money. And this equation works at any other discount price, at 5%, at 10%, at 50%.
- pfdietz 2y ago
  Such friction can reduce the rate at which the equilibrium is reached, but they can't prevent it. And I will note that insurance companies have incentive to adjust things to drive patients to use the cheaper options. We see this all the time in prescription plans that motivate use of generic drugs and cheaper pharmacies, and even coerce doctors to use cheaper, older treatments before newer treatments with superior efficacy (this has been happening in oncology, for example.) If they are willing to do that in the brutal competition to cut costs to attract people to their plans, they will certainly be willing to apply the screws to reduce GLP-1 agonist pricing.
  - avidiax 2y ago
    Generics are not the competition that you think they are. Drug companies have been paying the makers of generic drugs to not bring generics to the market. Insurance companies don't have the incentives that you think they do. If prescription drugs in general become more expensive, they simply raise the price of insurance. And if they are limited to taking X% of the rate as administrative fees, then this means that revenue increases. If the market followed the Chicago model as you think it does, how does the price of insulin increase? Why are drug prices increasing faster than inflation? https://www.ftc.gov/news-events/topics/competition-enforcement/pay-delay https://www.ftc.gov/news-events/topics/competition-enforceme...