On August 30, 2016, Laura Dimon and Ginger Adams Otis wrote an article for The Daily News under the headline “Protesters gather in NYC to show outrage of skyrocketing EpiPen prices.” The article highlights a controversy that is ongoing as this is typed – the price of potentially life-saving EpiPens has increased fivefold in the decade since Mylan Pharmaceuticals acquired the product.
One of the clear economic concepts that the EpiPen controversy demonstrates is elasticity of demand. As Guo (2012) points out discussing price elasticity of demand, the concept is simple. It is intuitive as well. When prices go up demand goes down. It really is that simple. The question is, “how much?”
Elasticity determines the “how much” question. For a cigarette smoker (or any other addict for that matter), price is very inelastic. The addict facing withdrawal will pay whatever it takes to get relief. At the other extreme, some commodities are almost perfectly elastic in price. Gasoline is a good example of this. Sunoco spends millions of dollars to have its brand featured at every NASCAR race in order to promote brand loyalty and thereby decrease elasticity. Regardless, gasoline stations will still sell their product within tenths of a cent of other gasoline stations. The only truly differentiated product is alcohol-free gasoline. This product demands a premium price and is handled through, for example, Briggs and Stratton distributors.
Possibly the best example of a product that has seen its price elasticity change dramatically is computers and, for that matter, consumer electronics in general. Sommer (2015) reminds us that Apple started the industry and quickly established itself as the “only” personal computer. IBM entered the field and with its “open architecture” philosophy, basically opening its computers for any programmer to develop programs for, quickly took over the then-new personal computer market. Apple had made a crucial mistake with its “closed architecture” philosophy and discouraged outside programmers. Within a few years Apple was relegated to schools and professionals with creativity needs. IBM and its clones quickly owned the business market. At that point, both IBM and Apple had significant brand loyalty and could command premium prices.
Compare that situation to today. Computers are a commodity. Once powerful forces with brand loyalty have been succeeded by any of a dozen manufacturers, all of which offer interchangeable machines running interchangeable software. Among personal computers elasticity of demand is nearly perfect although the Apple brand does retain a certain loyalty.
Monopoly is another economic issue highlighted by the EpiPen controversy. The stuff being injected, epinephrine, is available as a generic and the injectable component of the EpiPen has a value of a dollar or two. The administration device though, that part that makes the EpiPen an EpiPen and not just a syringe with some epinephrine in it, is, effectively a monopoly. It is not a perfect monopoly however. As Hawks (2015) reminds us, a monopoly can only exist when one firm effectively controls the entire market. That means there must be no alternative.
The delivery device does have alternatives. Keshaven (2015) points out one such product, the Auvi-Q that would provide the same function in a package about the size of a Bic lighter, much smaller than the relatively large EpiPen. Court (2016) sees Mylan’s recent announcement of a “generic” version of their own EpiPen as a way to head off competition by making margins less attractive. Shackford (2016) notes that Mylan’s monopoly is supported in part by a U.S. Food and Drug Administration that has, so far, refused to approve alternative delivery devices.
Perhaps the most significant economic principle demonstrated by this whole affair that that markets work. One of the repeating themes in Thomas Sowell’s Basic Economics is that markets driven by prices are the most efficient allocators of scarce resources for which there are alternative uses. When markets are disrupted, though, they are not allowed to perform this function efficiently. This is the case with EpiPens. With prices at 2016 levels those immutable laws of supply and demand (another economic concept on display here) would, in an open market, entice entrepreneurs to utilize their resources to develop an alternative to the EpiPen until market equilibrium was achieved.
The regulators of the U.S. Food and Drug administration, though, are not allowing this to happen. Requirements for approval are strict and some would say unrealistic. Nevertheless, they are in place and, so far anyway, have proven to be an effective barrier to entry into the market. This does not prevent enterprising individuals from developing their own "workarounds." Swetlitz (2016) provides the example of an Emergency Medical Technician who has started pre-loading standard syringes with epinephrine and having them ready in case anaphalyctic shock is encountered in the field.
Are the protesters who were the subject of the report cited above right then? In economic terms, they are not. This is a case, utterly predictable to any economist, where a business in a monopoly position has been maximizing profits. The numbers are truly impressive. The editorial board of the Los Angeles Times along with others such as Wieczner (2016) or Shackford (2016) point out that Heather Bresch, the much maligned CEO of Mylan Pharmaceuticals, has overseen the EpiPen rising from a minor division to a billion dollar a year profit center. That level of success is hard for any economist to argue with. Of course those more concerned with anecdotes will find the protesters to be on solid ground. You can expect arguments along the lines of “how can you profit on children’s lives” to come to the forefront. “Human Need Over Pharma Greed” reads one of the banners the protesters carried in the Dimon and Otis story. More of this will certainly be coming.
References
Court, E. (2016, August 30). ‘Mylan must be held accountable’: why a generic EpiPen could prevent a cheaper product in the long term. Market Watch. Retrieved from http://www.marketwatch.com/story/mylan-must-be-held-accountable-why-a-generic-epipen-could-prevent-a-cheaper-product-in-the-long-term-2016-08-29
Dimon, Laura and Otis, G. (2016, Aug. 30). Protesters Gather in NYC to Show Outrage Over Skyrocketing EpiPen Prices. Daily News. Retrieved from http://www.nydailynews.com/news/national/protesters-gather-nyc-show-outrage-epipen-prices-article-1.2771869
Ethanol Free Fuel. (2016). Briggsandstratton.com. Retrieved from https://shop.briggsandstratton.com/us/en/canned-fuel
Guo, V. (2012, Aug. 21). Price Elasticity 101: The Necessities and Your Pricing Strategy. priceintelligently.com. Retrieved from http://www.priceintelligently.com/blog/bid/154374/Price-Elasticity-101-The-Necessities-and-Your-Pricing-Strategy
Hawks, D. (2016). What is A Monopoly in Economics? - Definition and Impact on Consumers. study.com. Retrieved from http://study.com/academy/lesson/what-is-a-monopoly-in-economics-definition-impact-on-consumers.html
Keshavan, M. (2015, June 1). Watch out EpiPen: A better autoinjector for severe allergies is in the works. medcitynews.com. Retrieved from http://medcitynews.com/2015/06/epipen-windgap-medical-auto-injector-epinephrine-allergies/
Pettinger, T. (2015). Price Elasticity of Demand. economicshelp.org. Retrieved from http://www.economicshelp.org/microessays/equilibrium/price-elasticity-demand/
Shackford, S. (2016, August 25). Want to Reduce the Price of EpiPens? Approve Some Competition! reason.com. Retrieved from http://reason.com/blog/2016/08/25/want-to-reduce-the-price-of-epipens-appr
Sommer, J. (2015, April 25). Apple Won’t Always Rule. Just Look at IBM. The New York Times. Retrieved from http://www.nytimes.com/2015/04/26/your-money/now-its-apples-world-once-it-was-ibms.html?_r=0
Sowell, T. (2011). Basic Economics: A Common Sense Guide to the Economy. New York. Basic Books.
Swetlitz, I. (2016, July 6). High Price of EpiPens Spurs Consumers, EMTs to Resort to Syringes for Allergic Reactions. Statnews.com. Retrieved from https://www.statnews.com/2016/07/06/epipen-prices-allergies/
The Times Editorial Board. (2016, Aug. 26). EpiPen Price Gouging Demonstrates Need for More Competition in Generic Drugs. Los Angeles Times. Retrieved from http://www.latimes.com/opinion/editorials/la-ed-epipen-gouging-20160826-snap-story.html
Wieczner, J. (2016, Aug. 25). What Mylan’s EpiPen Cost Scandal Says About the Drug Price Problem. Fortune. Retrieved from http://fortune.com/2016/08/25/epipen-mylan-cost-coupon/
