[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...

[WalterBright]

The two seminal events in the 1960s are the FDA 1962 "effective" mandate, with subsequent sustained price spikes is well documented in Peltzman's "Regulation of Pharmaceutical Information".

The other one is the enactment of Medicare/Medicaid in 1966/1965. From the graphs I've seen, that corresponded with the knee in the curve.

[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.

[WalterBright]

> could be captured by healthcare.

Why wouldn't it be captured by farmers? or carmakers?

> all of financial theory AND history

Can you give case history of a company that maintained a monopoly via periodic dumping to bankrupt any competitors? I'm not aware of one, and no, Standard Oil is not one (see the book "Titan" about it). I've read many econ/history books, and none them put forward your dumping theory. Do you have a book reading list?

[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.