Economics Commentary

This graph is specific to an oligopoly and shows the change in quantity demanded in relation to the change in price for both elastic and inelastic goods. Total Revenues will be increased, if the firm decreases their price but increase their quantity. Due to the fact that the costs remain the same, the revenue line on the graph can be seen to be steeper than the costs meaning that the profit is higher. The graph therefore also indicates the point where the firm is able to make the most amount of profit, in relation to the price they set and the quantity they produce.

Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%

Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left.

The rise in drug prices is causing the public to ask why this is so and why there isn’t anything being done, or what the reason could be for sky high prices. Some of the reasons include pharmaceutical companies setting their drug prices

The prices of prescription drugs in the United States are by far the highest in the world. [1] On average, Europeans pay 40% less than Americans for the same medications. [2] Consumers have been resorting to several ways, sometimes putting themselves in harm’s way, to alleviate the burden of high prescription drug costs. Some buy their medications online or cross the borders to neighboring countries so they would be able to afford buying their needed medications. Others have resorted to the illegal act of selling their unused medications in online forums just to recover part of their expenses. Many factors contribute to the increased drug prices in the United States including research and

In 2015, the pharmaceutical industry spent over 27 billion dollars on advertising. The two greatest components of this effort were promotional advertising and free medication sampling, which the pharmaceuticals invested 15.5 and 5.7 billion dollars respectively (“Persuading the Prescribers”). Promotional advertising involves direct contact with health professionals, the most common being extravagant lunch conferences held for physicians and their staff. On the other hand, sampling involves distributing free sample of medications to physicians, who then have a choice of providing these samples to patients. As a result of these methods, the industry has seen revenue around $400 billion with 90% of physicians having a relationship with a drug company (Campbell 2007). Moreover, the prices of prescriptions continue to rise; a copay of a generic drug is $11.72, preferred brand drug is $36.37 and a specialty drug is $58.37 (Coleman and Geneson 2014). Although the profits are immense in the numbers demonstrated above, it is no surprise when pharmaceutical drug companies elevate their prices even more. For instance, recently Turing Pharmaceuticals raised the price of their medication Daraprim from $13.50 to $750. Keep in mind, this medication is used for threatening parasitic infections, aids, and cancer with alternative options currently found to be inefficient (Pollack 2015). Another example of this practice involves cycloserine, a drug used to

Prescription drug prices are on the rise in the United States. Currently, the United States does not implement a price control on prescription drugs. Every day the supply and demand for prescription drugs fluctuates. Pharmaceutical companies produce drugs that are necessary for survival. Therefore, it is necessary for research and development to continue in the United States. Those suffering the effects of exorbitant prices must do so until a generic form of a prescription drug is produced. Once approved by the FDA, new drugs will make their appearance on the market and patients will no longer suffer financially. Until then, it is necessary for pharmaceutical companies to price their drugs based on the idea of supply and demand. This produces the profit used to fund research. Price controls discourage innovation. If a price control were set in place, of course the price of prescription drugs would decrease. However, the development of new drugs decreases with it. Today’s generation would benefit from lower prices, while future generations would suffer from the loss of drug innovation.

Externalities, also viewed as the negative spillover effect, plays a role in market failures associated with pharmaceuticals. In the pharmaceutical sector, externalities take place when consumers affect the utilization of a drug’s value.  Externalities typically stop consumers from receiving cheaper costs for drugs because they normally don’t carry the complete costs of drug expenses. Negative externalities induce a cycle of ongoing sales, more profits and more subsidies.  Thus, if externalities are left to be controlled by a market then the implications will lead to high pricing on products.

The new audio greeting message affects the demand for greeting cards. The demand for greeting cards decreases because greeting cards and audio greeting cards are substitutes. The demand curve for greeting cards pads shifts leftward, from D0 to D1 in Figure 4.6. Simultaneously the fall in the cost of producing a greeting card affects the supply. The fall in the cost of producing greeting cards increases the supply and the supply curve shifts rightward, from S0 to S1 in Figure 4.6. At the initial price of a greeting card, $5.00 in Figure 4.6, there is a surplus of 60 greeting cards per week. The surplus forces the price lower, so the equilibrium price of a greeting card

Prescription drug prices rose three times faster than inflation in the decade between 1981 and 1991, making the pharmaceutical industry the nation's most profitable business. Prescription drugs even exceeded the rapidly rising inflation rate for all other medical services. They now represent at least 10% of all the medical

Marvin Koslow, vice president for marketing services at Bristol-Myers is going to choose a positioning strategy for Datril, an acetaminophen based analgesic, in order to solidify Bristol-Myers’ position in the analgesics market and gain share in the rapidly growing acetaminophen market. There are two possible options: ‘Pricing at par with Tylenol and it as a Tylenol substitute, featuring Bristol-Myers product’ and ‘low Priced alternative to Tylenol’. I strongly recommend that Bristol-Myers choose the former option with a modification.

The problematic issue for Bristol-Myers was to position its new aspirin drug to the potential customers and decide a good price which can not only make it acceptable by the customers, but also give a fair profit to the company. In other words, the company had to formulate an effective marketing and promotional strategy for its new drug, Datril. The company was not merely willing to establish its new brand in the analgesic market; the main issue was to establish this new brand in the presence of a strong competitor, Tylenol.

Consumers do not always evaluate prices objectively. Often a referenced price is a known and available price, like that of a competitor. Pricing Datril at par with Tylenol and advertising it as a new substitute with same features may have been a fraught tactic in a short-run test environment. Market penetration and share take time and is unknown. Additionally, a price war could have ensued with Tylenol due to cost differences especially in advertising.

This case study focuses Burroughs Wellcome and their drug Retrovir. Retrovir is a drug that treats AIDS and AID-related complications. In 1987, Burroughs Wellcome obtained approval from the FDA to market azidothymidine (AZT), also known as Retrovir, as a treatment for AIDS. Retrovir was the only kind of drug on the market. Because of this, many critics accused Burroughs Wellcome of price-gouging, as the price of Retrovir was $188 for a hundred 100mg capsules sold to wholesalers. The president of Burroughs Wellcome, T.E Haigler, defended the high price, stating it was due to uncertainty in the market, the possibility of new drug therapies, and profit margins created by new drugs. Even though Retrovir’s price was dropped 20 percent in December 1987, and 20 percent more in September 1989, due to the House of Representatives launching an investigation, there was still pressure to lower the price. The big question faced in this case is what is Burroughs Wellcome’s next move regarding pricing?

When the price of a good rises the quality demanded falls, if we think about how much does it falls. To figure out by how much it falls we must calculate the price elasticity of demand which is calculate by how responsive demand is to rise in price. Also, the price elasticity of supply measures the responsiveness of quantity supplied to a change in price.