[Ironchefpython]

> The price hikes would immediately attract lower-cost competitors if this were truly a free market.

Any participants in a free market for a product with inelastic demand (e.g. something you need to stay alive) and non-trivial entry costs immediately implements price fixing in the absence of regulation.

When life-saving devices that require a significant supply chain to manufacture capture the bulk of consumer surplus from the majority of potential customers (and the poorest are left to die), the free market is working as intended, efficiently allocating resources to maximize profits.

[gwright]

The non-trivial entry costs are there because of regulations and the legal environment regarding liability.

You can view the high price as the free-market finding the intersection of supply and demand given the regulatory and legal constraints but that seems like a less than useful way of understanding 'free-market'.

[Ironchefpython]

> You can view the high price as the free-market finding the intersection of supply and demand given the regulatory and legal constraints but that seems like a less than useful way of understanding 'free-market'.

Stop using regulation as a stalking horse for your argument. Everything you need to know about the price of epi pens you can derive from inelastic demand (people don't want to die), and barriers to entry (copyrighted brand, network of doctors writing prescriptions, and yes, FDA approval so these things don't kill people).

The price is high because people will pay almost anything to not die. This drives the price point up to capture consumer surplus. It's easy to understand.

The Free Market isn't a magic bullet that will drive down these prices. For one simple reason. Rational actors don't compete on price. I'm going to repeat this, because so many people don't get it.

Rational actors don't compete on price. Rational actors will spend up to their expected monopoly profits to create a Nash Equilibrium where new entrants into a market will be unprofitable. The simplest way to do this is through dumping. (see "competition" in the generic drug market for example) Why doesn't this happen in every market? Regulation.

Maybe you don't like that in unregulated markets, people starve, are poisoned, are denied treatment, and worked like slaves. Because that's how you maximize profit, by minimizing your own costs by maximizing externalized costs. So you'll think anything to avoid that realization. Like blame 'regulation' for what's obviously rationally maximizing profits.

And if you want to know how exactly the 'free-market' for medical supplies would work without regulation, just look at the 1800s. Demand was still inelastic, so prices were high, quality was low (for obvious reasons), and competition was still stupid, because price fixing and dumping were still more profitable than competing on price.

[gwright]

Let me see if I can be a bit clearer. A market with high barriers to entry that are defined by regulations and legislative constraints is not a free market. It is a market, just not a free market.

Blaming high prices in this situation on a failure of the market mechanism is simply inaccurate. The high prices are a result of the constraints that prevent competition and the emergence of a free market.

I'm not sure what to say about your assertion that price isn't a component of a competitive market. Certainly competitors try to compete on 'value' of which price is a component among many others (ease of use, features, reputation, availability, etc.).

I don't know what you are defining as 'unregulated markets', but I'm not advocating for the removal of legal frameworks that prevent fraud, negligence, collusion, and so on.

[force_reboot]

I have a PhD in economics, and your claims about monopolies and competition aren't accurate.

Economic theory doesn't state that monopolies always arise, at least not under the circumstances you are describing. If you can buy your competitors, or make a legally binding contract to compete, the yes, monopolies are inevitable. And as you say, inelastic demand does make monopolies more likely, though your intuition that medical goods have inelastic demand may be wrong, e.g. see the RAND health care study where they randomly assign people insurance types, and find the high deductible group consume less healthcare even in emergency situations.

In the general situation, no theory guarantees that monopolies arise in the absence of regulation (apart from the above to cases which aren't the regulation you're discussing).

>Rational actors will spend up to their expected monopoly profits to create a Nash Equilibrium where new entrants into a market will be unprofitable.

In economics, anything that relies solely on Nash Equilibrium is doubtful. In most situations, Nash Equilbria are not unique, and therefore it's hard to say what will actually happen. If the Nash Equilibrium is unique, usually some stronger equilibrium concept applies like dominant strategy equilibrium.

In your case it would be more accurate to say that committing to drive out potential competitors can be a Nash Equilibrium for some parameters.

[WalterBright]

> how exactly the 'free-market' for medical supplies would work without regulation, just look at the 1800s.

Do you have a source for this? Medical costs started angling up steeply in the 1960s with the advent of heavy regulation.

> dumping were still more profitable than competing on price.

Isn't dumping competing on price?

[Ironchefpython]

> Medical costs started angling up steeply in the 1960s with the advent of heavy regulation

Broadly, to a first approximation: Medical costs, real-estate, and education have increased in price to capture the consumer surplus created by the decline in food. clothing, and fuel costs.

> Isn't dumping competing on price?

Nope, dumping is used to drive new entrants out of a market. It also acts as a signal to prevent new market entrants.

If I sell 2 million widgets per year at a price of $10 over a cost of $1, after $4 million in capital costs, I can maintain a monopoly if I'm willing to drop my sale price to 50 cents every time someone enters my market, and I raise the price when they exit it.

This creates a Nash Equilibrium were no rational actor will spend $4 million to build a factory to compete with me.

[WalterBright]

> have increased in price to capture the consumer surplus

It is quite a remarkable coincidence that medical costs angled steeply upward immediately after heavy regulation and government involvement in it began.

> I can maintain a monopoly

It'll be pretty hard to swallow $1 million/year in losses to do so. You'd have to maintain those losses to beat back even a small competitor, who would have proportionally smaller losses. A small competitor would have the capability to ruin your business with a small investment on their part. I bet they could finance it by shorting your stock.

[makomk]

The US government has been heavily involved in regulating medicine since 1906. The only reason why "medical costs angled steeply upward immediately after heavy regulation and government involvement in it began" is because "heavy regulation" is a weasel-word; you could pick almost any point after 1900 or so and claim that's when it started in order to justify that argument. Take a look at the list of milestones here for example: http://www.fda.gov/AboutFDA/WhatWeDo/History/Milestones/ucm1...

[Ironchefpython]

> It is quite a remarkable coincidence that medical costs angled steeply upward immediately after heavy regulation and government involvement in it began.

Regulation didn't give people more money to spend on medicine. Offshoring jobs to China drive down prices of consumer goods to make more money available as a consumer surplus that could be captured by healthcare.

If the price of food increased, the price of housing, education, and medical care would decrease. Because the demand curve would change.

> A small competitor would have the capability to ruin your business with a small investment on their part. I bet they could finance it by shorting your stock.

That's a nice hypothetical that completely ignores all of financial theory AND history. If you ever start a company, let me know so I can short YOUR stock.

[hackuser]

> The non-trivial entry costs are there because of regulations and the legal environment regarding liability

I think that misplaces the cause. The requirement for safety and the high cost of failure is what creates those regulations and liabilities.

Theoretically, we could eliminate the regulations and liabilities and just let people die, but 1) that's a really bad idea, and 2) it would be excluding from the market mechanism (i.e., externalizing) the most important aspect of the product, its safety.

[makomk]

Suppose there were no regulations and no liability for manufacturers. Would you really trust your life or your kid's life to some unregulated clone of the EpiPen that may or may not actually work properly when needed, knowing that if it went wrong the manufacturer wouldn't even have to pay one cent of your medical bills and didn't have to worry about liability for screwing up? I suspect not.

[aianus]

You would if you literally didn't have $600 for the brand name version.

Maybe $600 is an amount that everyone can get with some sacrifice but there are other drugs/devices/procedures that cost $10,000s or more where people just have to go without because they're not allowed to take a chance on an unregulated alternative.

[ancap]

I can think of many products which are life-saving which are readily available from countless producers for relatively cheap. The difference here is just as gwright has pointed out and you have a corpus of regulation which makes this particular product more expensive and/or chokes out competition.

The only sectors of the economy where significant, lasting shortages occur are the ones most heavily regulated.

[Ironchefpython]

> The only sectors of the economy where significant, lasting shortages occur are the ones most heavily regulated.

So you're saying that Petroleum Exporting Countries would never say... create an Organization intended to increase the price of oil?

Or the DeBeers wouldn't collude with diamond producers to limit the availability of diamonds to increase the price?

Or that manufacturers and distributors of light bulbs, lysine, copper, cleaning powder, vitamins, glass, milk and machinery would never, ever engage in price fixing?

I want to live on your planet, where capitalism is so nice and perfect that companies rush to give away all their profit by competing the marginal cost down to zero without any of those pesky regulations.

[icebraining]

So you're saying that Petroleum Exporting Countries would never say... create an Organization intended to increase the price of oil?

How does that help your case? The members of that organization are governments, not companies. OPEC is regulation.

[jaekwon]

I'm curious why people are downvoting this.

[WalterBright]

In the software business, with pretty much zero regulations, competition has run the price literally to $0 for broad swaths of products.

[Ironchefpython]

> In the software business, with pretty much zero regulations, competition has run the price literally to $0 for broad swaths of products.

That's like saying that price competition is alive and well because banks will give you a free toaster when they charge fees to loan your money back to you.

But to address the specifics of the software industry, software is a complementary good.

This has been the driving force in the price of software for decades: http://www.joelonsoftware.com/articles/StrategyLetterV.html

And it's true today. The biggest contributor to Linux is... Intel. Because it sells hardware. Google gives you a free browser so it can sell ad space.

[WalterBright]

I know many software companies with essentially a single product, which they give away. They make money selling service contracts, which enough customers buy to make it worthwhile.

The price is still $0 and there are still no regulations on it.

Most (all?) commercial products have complementary products. This is hardly unique to software. I seriously doubt the theory that medical products have no complementary sales.

[hackuser]

> The only sectors of the economy where significant, lasting shortages occur are the ones most heavily regulated

That's not what economic theory (and practice) say, I'm pretty sure. For example, unregulated electrical, communication (including Internet service) and transportation markets have resulted in shortages in rural areas. Unregulated food and housing markets (and many other markets, including Internet service) result in shortages for poor people. Unregulated fishing creates shortages of fish - a 'tragedy of the commons'. Monopolies and oligopolies eliminate whole categories of products.

The free market is very good for some purposes, but it's not a benevolent God that finds solutions to all our problems. It's just a very useful tool in the toolkit.

[ancap]

I would first like to point out that in the context of this conversation the definition for shortage I am using is that there is a shortage of a good or service where it once was readily available. Sure I could, say, take a rocket ship, to mars and denounce the absence of internet connectivity, but that's not what I'm referring to here.

>unregulated electrical, communication (including Internet service) and transportation markets have resulted in shortages in rural areas

Again, according to my above definition this is a slightly different topic, but it seems highly dubious that a lack of regulation is what has resulted in shortages of internet service is some podunk town.

>Unregulated food and housing markets (and many other markets, including Internet service) result in shortages for poor people

The most significant factor limiting the availability of low cost housing is municipal regulation, not the absence of it. I'm not aware of any place in a developed nation which has a shortage of food. It seems what you are getting at is the options may not be affordable for some, but that is a different concept from a shortage. Furthermore, it is a bit of a stretch to refer to the food and housing markets as "unregulated". If there are any shortages in these markets it's certainly not due to a lack of regulation.

>Unregulated fishing creates shortages of fish - a 'tragedy of the commons'

I have commented on the idea of "tragedy of the commons" many times. It generally leads to quite a tangent in the conversation, but if you're truly interested I'd be happy to discuss why the problem does not lie with a lack of regulation.

>Monopolies and oligopolies eliminate whole categories of products.

A true, lasting monopoly is only possible through market regulation which strangles out competition. All the textbook examples of "monopolies" (Standard Oil) were not monopolies at all. In fact in the early days of electricity there was so much competition in the big cities that the big guys lobbied hard to get their monopoly privilege.

[hackuser]

You make many claims in strong langauge, but that's not itself meaningful. They are at odds with what I learned from economists, and from what I believe is the very widely accepted consensus in the field (though I might have a few details wrong). Regulation is a normal, effective response to market failures, which sometimes result in shortages.

Of course, I'm not providing any citations myself!

[WalterBright]

Food is necessary for life, but food (in the US) is cheap, and food prices are not regulated.

[gpderetta]

There is also no government protected monopoly on food (although not for lack of trying).