Why should the market price be $300? If it only costs $12.53 to manufacture, someone could sell epipen equivalents for much less than $300 and capture the whole market.
Suppose there are only two competitors and the barrier to entry for a third is high. You profit $287.47 per unit with partial market share. If you try to charge $200 so you only make $187.47 per unit, your competitor will also lower the price to $200 and you will both end up with the same market share but less profit. Even if the two participants in the market never communicate, the obvious strategy in a two-player game is keep the high price.
This works when there are two people (who can maybe even use the same golf resorts), but it’s impractical when there are 10 or more since anyone has a temporary advantage to defect. That’s how free markets are supposed to work and I think people might expect that to happen here. It’s just that, as you noted, with only two particiants allowed in the market, forming a cartel is trivial.
That's true because it's not trivial to launch a new drug/delivery system. Even generics have to prove that their drug matches the kinetics of the patent drug and has other similar properties. There is still an FDA process to approving a new drug, and if I'm not mistaken, the new delivery device also has to have it's own approval through the FDA medical devices division.
All of that is before you even take into account how much it costs to re-tool your production line to make something different. Sure, you could lower the barriers to entry until they're barely existent and offer almost no consumer protection, but I'm not really sure we want to make it so easy that a company will spin up a production line to make a drug for 6 months while they think they can undercut the competition.
Then again, I'm a big pharma biologist, so I probably am a bit biased toward safety and large, slow movements.
A solution to this particular problem could be to make the patents on the existing, known to be safe methods expire earlier, so that in order to retain a monopoly on something big pharma must make a significant patentable improvement.
Critics of this policy say that it would disincentive new drug development. That may be true, but for many people it doesn’t matter because they can’t afford them at current monopoly rates anyways, and our insurance industry is broken for them.
I wonder how you would go about researching a better patent-expiration scheme and the effects it would have.
Edit: maybe I misunderstood you- are you saying even with no patent protection, the barrier to entry is still high enough to disincentivize new entrants because of safety regulation and retooling costs? So patents aren’t the only roadblock, or not even necessarily the main roadblock?
I mean what you say in your edit. Even off-patent drugs require basic proof that they are what they claim to be, are similar to the patent drug in important ways, have a safe formulation, require a company to make a production line for it, and even require some marketing in many cases to make sure people know there's a new manufacturer of that drug.
I've never worked in generics, so I'm certainly not an expert, but I am saying both that we need some of the safety and quality controls by the FDA (or some system to replace them without relying on companies' good will) and that there are big hurdles even disregarding the FDA or other regulatory bodies.
”Even if the two participants in the market never communicate”
But you can’t get at identical prices without communication between parties. Without communication, initial price setting is as if both companies make a bid in a sealed envelope.
It would be highly unlikely that both bids would be identical, and the lowest bidder with a price above $12.53 makes all the profit.
The two participants didn't appear at the same time. When the first participant appeared and set the original price, that price became an obvious Schelling point.
No, it's more like this: I'm the CEO of a medical drug supply company. I want a new yacht, or a new Jetstream private plane, or hell--why choose between them when I can get both? What price should I charge for a drug millions of people need each year so that I can continue to enable my decadent lifestyle?
If the historical price is X, but I can charge 4X because people need the drug, let's charge 5X so I can make even more profit because demand is inelastic.
And the bad PR of news reports of people dying because they can’t afford our lifesaving products can be addressed by issuing a press release announcing price cuts and a coupon program which will both be ended after the public moral outrage dies down.
One should be hesitant to proclaim knowledge of the optimal strategy without knowing all the details. Whether or not the default strategy is to cooperate or betray is sensitive to the precise weights of the rewards for each combination of decisions, as well as the number of times the game is played. For example, in the simple version of the Iterated Prisoner's Dilemma, the optimal strategy is tit-for-tat: the default is to cooperate, and only betray in exchange for being betrayed.
I mean, that really isn't the default strategy. As Adam Smith recognized in Wealth of Nations, the default strategy is always to collude:
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
> As Adam Smith recognized in Wealth of Nations, the default strategy is always to collude:
That's a misreading of Smith's point, but it's also irrelevant here, because it's quite a leap to assert that "the default strategy is to engage in blatantly illegal activity".
That's only default for actors that are dumb. Most humans are smart enough to take advantage of an obviously better strategy that also doesn't really require coordination.
technically yes, that is the default strategy in perfectly competitive markets, but collusion happens because it maximizes profit for both companies despite it being anti-capitalist.
for plausible deniability, the two companies typically don't directly talk to each other, but a lot of signalling happens via public statements and marketing channels to indicate a desire not to compete (as a simplistic example: raising prices when the competitor lowers theirs).