[nickff]

These strategies can allow governments to bargain down the cost of products to the marginal cost of production; the only problem is that if every buyer does the same thing, the supplier goes bankrupt (as it can't cover its fixed costs). This strategy also doesn't allow for any earnings to be retained for product development, and discourages investment in the field but those are separate issues.

[rfrey]

This sounds like capitalism. This is the inverse of the anti-marketplace argument that capitalism leads to monopolies, which then price-gouge consumers.

In this scenario, consumers drive the prices too low and put suppliers out of business. It's the same argument coming from the other direction.

Markets don't seem to work like that. Prices get driven down, but not to the point where suppliers go out of business, because they won't sell at that price. Sometimes if margins are too low new players will find efficiencies or new inventions that allows them more profit for awhile.

For this to happen you need a balance of power between buyer and seller. It's obvious to me that such a balance is radically absent in the US system right now.

Putting governments into the role of buyers is not anti-market - it's pro market because it allows an informed, more powerful buyer that balances the market forces and allows the market to work. (It's certainly possible that other entities, such as insurance companies, could fill the same role.)

A worry comes because of the label "single buyer" which is the inverse of a monopoly and is anti-market. But in practice drug companies are global and there are many governments.

All this would lead to much lower profits for drug companies, of course, but that's not a pro-market argument, that's a pro-monopoly concern.

[tpeo]

>This is the inverse of the anti-marketplace argument that capitalism leads to monopolies

I don't think I have heard such an argument, and I understand the parent comment just fine.

What he means is that, since pharmaceutical and medical supplies companies have large upfront research costs coupled with negligible marginal costs, they face a falling average-cost curve. However, a firm operating under competition has it output at the point where marginal and average costs are equal. The point is that for a firm who profits off research, reaching this point is unfeasible. What all this economic gobbledygook is that, in order to survive, firms have to charge above what would be otherwise the "warranted" price (like the price of the components and labor that go into a kit).

This is more obvious in the case of software, since the cost of copying any piece of software is pretty much zero, anyone trying to sell it for it's marginal price won't ever get what he put in by having written it in the first place. In such markets the socially efficient outcome, the one which makes both consumer and producer better off, is actually to have a single or few firms regulated firms operating under imperfect competition. And all this happens because of the cost structure of the firms, not because of the market itself.

Though I'm rather skeptic that pressing on the suppliers will push them near their marginal costs in this particular case.

https://en.wikipedia.org/wiki/Cost_curve

[abricot]

They can, but that is not what all of them are doing.

They realize that if they only cover marginal cost, and don't allow for development, they will only get the right product for a limited amount of time.

What often happens is that they agree on a more realistic price that will allow for that.

In many cases the company will go low to still be the supplier for a whole country - especially as they can still keep their margins in other countries, like US.

[nickff]

I think we agree on this, but the strategy of bargaining down to near marginal cost is dependent on the US customers paying for the fixed costs. The 'internationals' don't have to worry about doing safety studies or drug development either, so they can just take advantage of US companies doing the expensive work. For their part, the US government seems to know what they are doing too; they know they pay more for the drugs than anyone else, and do so to retain the industry.

I'd compare it to a 'tragedy of the commons' scenario where one farmer keeps paying his son to re-turf the meadow, so the boy can have a job (and thereby feeds everyone else's sheep).

[willvarfar]

Its not in the interests of the monopolist to put their suppliers out of business.

They can set up non-profit-driven suppliers, but it seems probable that normal for-profit suppliers will flourish.

[nickff]

Do you mean the monopsonist? I am not sure that I would define the governments who provide drugs to their citizens as monopsonists or monopolists outside of being monopoly suppliers to their own subjects.

I agree that the 'internationals' who control domestic drug consumption have little incentive to set up their own drug production systems, but if my supposition is correct, they need the US to keep paying higher prices for the same drugs.

[cmdrfred]

The "expensive work" here was 15 percent of GlaxoSmithKline's revenue last year. They spent 40 percent on marketing. When can this myth die?

http://www.bizjournals.com/triangle/news/2016/07/19/where-gs...

[grive]

> the only problem is that if every buyer does the same thing, the supplier goes bankrupt (as it can't cover its fixed costs).

The government is responsible for using a fair price, both for itself and the supplier.

His non-profit nature ensure that it will not try to lower the price too far.

If a politician is dumb enough to make companies go bankrupt, it's the responsibility of the people to vote him out of office.

That's the only way to have a fair price on drugs. A free market cannot exist in these industries and the inelasticity of the demand will always, always distort the prices.

Yes, America will have to face its demons and trust its government. The alternative is to continue paying exhorbitant prices to greedy scumbags and let fellow citizens die as a result.