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* Correspondence to: Taruja Karmarkar, Doctoral Candidate, Department of Health Policy and Management, Johns Hopkins Bloomberg School of Public Health, MD, USA. Email: [email protected]
1. Introduction
Pharmaceutical companies use different pricing strategies including profit maximization, return on investment and value-based pricing 1 to set their prices. Recently, some pharmaceutical companies have announced substantial price increases for existing branded and generic drugs. In the space of branded drugs, new specialty drugs entering the market show prices between $50,000 and $750,000. This rapid increase in prices in both branded and generic drugs have caught the attention of the public and policy makers and have resulted in a flurry of legislative activity. Most economists are trained to study markets, the laws of supply and demand, having buyers and sellers agree on a price (Arrow, 1963). However, some economists also study distributional equity, which, like efficiency, is an outcome of markets that individuals and societies care about. We examine if economists perceive the pharmaceutical market differently from the public and legislators.
More specifically, the article focuses on the “fairness” of pharmaceutical prices. A simple question can illustrate the fairness issue for economists – is it fair to significantly raise the price of sand bags during a hurricane? To some economists, the answer is a firm yes because the market sets the price and a person is willing to purchase the sand bag at that price. Prices signal what the purchaser values and allows for more innovation – better and more prevalent sand bags in the future. We anticipate that some economists will support the view that these economic principles apply to all goods and services including prescription drugs. Other may argue that prices are unfair when providers are taking advantage of inelastic demand. On the other hand, other economists may perceive these entry prices and price increases as being unfair because it interferes with the trust relationship necessary for health care services to be effective. In addition, some economists suggest that considering fairness may have an economic value. Lack of fairness in pricing practices would create anger among customers and the public’s perception of a company as an unfair player would decrease its value as it diminishes the long-term loyalty of its customers (Rotemberg, 2008; Thaler, 2015).
The public...