Walmart got to where it is by taking out the easy pickings competition in small towns.
That's how it started but it isn't their whole story.
In any case if the "pickings" are easy, than its a good thing Walmart entered the market. "Easy pickings" amount to uncompetitive retailers, who either are inefficient and waste resources, or have high profits that can be undercut to the benefit of consumers (in this case probably more the former than the later).
And to keep from shrinking, like other retailers, even very large ones, have before it, Walmart has to stay competitive. Government organizations don't. If you don't like the DMV, or the Medicare they get your money anyway. If you don't like the IRS, well you can't find a competitor that charges less.
Unfortunately this letter won't do you any good
tatfoundation.org
Wallmart doesn't make its customers cope with this type of mess
Message 24518950
You missed the point of this example entirely. The government cut the price they could charge for their scans so they were forced to innovate. What about this do you not understand? I wasn't talking about meeting their competition, it was an example of them meeting their customer's requirements.
That was for an existing business not for something totally new, and even here the government was lucky. Sometimes you force down the price, and the company just abandons the business. The risk of developing the new scanner was not equivilent to the risk of developing a new drug. The cost for testing would almost certainly also be less. Its not a really good example for your case, and even if it was it would be but one example, with most of human economic history as a counter example.
Are you saying that drug companies are falsifying the expense of providing free samples? Does the IRS know about this?
I'm sure they comply with the IRS rules. They deduct the market cost, not the cost of production, the assumption is that they lose business by providing these free samples. If that was really true it wouldn't be marketing, and in any case for the most part it isn't true.
More on this issue (which you'll probably ignore because the links go to one person who's a libertarian and to another person who has worked for several major pharmaceutical companies)
Supply, meet demand. Demand, meet supply. I just knew you two are going to hit it off!
meganmcardle.theatlantic.com
You're thinking of it as a budget problem, I think; I think of it as an investment problem. Drug research is very, very risky; depending on how you count, between one-in-a-thousand and one-in-ten-thousand drug candidates make it all the way through trials. Who would take that kind of insane risk with their capital if the payoff were a government contract for cost+10%?
manifestdensity.net
People who think that there will be continuing R&D in the pharmaceutical industry are basically thinking of it as a budgeting problem. They think of the pharmaceutical industry's gross income as a budget to be allocated between various functions, such as marketing and R&D. They may concede that by changing the size of the budget, you may shrink the amount of money to fund R&D, because there will be less money in the kitty. (Though many or most hope that shrinking the size of the pie will force pharmaceutical companies to transfer money from the advertising budget to R&D1). But, their reasoning goes, there will still be money in the kitty; if you allow pharmaceutical companies 1/3 as much gross income, you will get 1/3 as much R&D. Or perhaps they will cut their advertising budgets to zero, and then you will get 2/3 as much R&D. But still, you will get something.
I don't think of R&D as a budgeting problem; I think of it as an investment problem. After all, even if the pharmaceutical industry has no profits right now, they can borrow the money in the financial markets at fairly attractive rates.
The main obstacle to R&D, then, is not the current state of pharmaceutical industry profits; it is the potential return on the investment in R&D. After all, Merck doesn't have to make drugs; it could generate a nice, safe return of 5% a year in government bonds. Or it could get into some other business, such as making soap. If you drive down the profits on new drugs too far, it stops making sense to invest in new drugs, even if there is a small profit to be made on current production.
Developing new drugs is very, very risky. Depending on what you think constitutes a drug candidate, somewhere between one in one thousand, and one in ten thousand drug candidates makes it from a lab bench to clinical trials. Each of the failed drugs was very expensive, particularly if it got partway through clinicals, which run about $500 million per course.
The problem is, once you've developed a drug, it's easy to copy. It's also usually trivially cheap to produce. And your patent is rapidly running out. This gives a monopsony buyer a lot of leverage to force down your price--you're almost always better off taking something. This is particularly true if the monopsony buyer has the power to break your patent and license its generic manufacturers to turn out cheap but near-perfect imitations of your product2. This is, in fact, what Europe has done; they make pharmaceutical firms sell to them at cost plus. The lion's share of the profits on any drug come from the United States; what they get in Europe and Canada and the rest of the world is (thin) gravy, a price that is just a little bit better than not selling any drugs there.
Now imagine that America drives drug prices down to that sort of "cost+10" or "cost+20" level. The pharmaceutical firms will keep making the drugs they already have, because there will still be a little profit there. But they would have to be psychotic to invest billions of dollars over a 20 year time horizon in exchange for a one in a thousand chance of making that small a profit. Would you put 20% of your income now into an investment that might yield a profit of 10% of your income--in thirty years?
But they have to invest in R&D, say my interlocutors; otherwise they won't have any drugs to sell! This makes the odd assumption that they can't do anything else. But history is full of companies that used to do something else entirely--and also, of companies that went out of business when their market collapsed.
meganmcardle.theatlantic.com
Why can't we just fund R&D from pharmaceutical advertising budgets?
29 Jan 2008 04:28 pm
Even if companies could, they won't, for reasons I just explained. But mostly because pharmaceutical advertising budgets aren't really very big. People who think that there is a gigantic pool of capital that could be sucked out of the pharmaceutical advertising budget are being misled by accounting terminology. People who rail against the pharmaceutical industry are fond of noting that about 20% of industry revenues go to marketing, with the implication that this is all wasted on advertising baldness cures during Golden Girls reruns. But just the top ten firms in the pharmaceutical industry took in about $350 billion in revenue in 2007, 20% of which is $70 billion. The entire US expenditure on advertising by all companies in all media forms totaled something like $150 billion in 2007. I know it seems like every other commercial you see is for Botox, but most advertising is not done by pharmaceutical firms.
In fact, advertising is only a small fraction of that marketing expense. Over half of it expense consists of free samples, the offering of which seems to me like an unalloyed public good.
meganmcardle.theatlantic.com
And that’s the problem with setting prices that way: the temptation is for whoever is on the thick end of the whip – that is, whoever can determine prices by force of law – to set them and be damned. It’s not just drugs: I’m sure that people would, if they thought they could, vote themselves cheaper cars, not to mention the gasoline that runs them. But oil’s a commodity that trades freely, and there’s a constantly changing market price for it. A new medication, on the other hand, has just one supplier. There's just one neck presenting itself.
That turns negotiations between drug companies and governments into a rough business. Very quickly, things can come down to their ultimate positions: “We won’t let you sell in this country” versus “We won’t let you have this drug”. Note that both of these end up with the citizens involved being denied a chance at medical care. It’s as if rug-merchant transactions tended to escalate into threats to set the bazaar on fire.
Governments have another weapon when things get to that point: compulsory licensing. This has already come up with Brazil and Thailand, and will no doubt be threatened again in other places. And that brings me to my depressing point: this playing field will never be level.
Ideally, I would like to see drugs, and drug companies, compete strictly on price and on effectiveness. And I’d like to see that happen around the world, and let supply and demand sort things out. I think that prescription prices would go down a bit here, and up in many other countries. At the same time, generic drug prices would probably drop outside the US. But it won’t happen. The more I think about it, the more I fear that drugs and other health care will never trade on a free market. The temptations to do otherwise are just too great.
pipeline.corante.com |
