Price Gouging vs. Capitalism

[Omy]

Why is it considered price gouging when individuals buy up hand sanitizer to resell it for a profit...but considered capitalism when drug companies and other corporations do it?

[ender]

I suspect if drug companies bought up all the generic version of their name brands and then raised prices, it would be.

[maizefolk]

I suspect even raising prices on products they manufactured themselves would be enough for a corporation to run the risk of being branded a price gouger.

Grocery stores could have just kept increasing the price of toilet paper until it didn't constantly sell out as fast as they could put in on the shelves. That would have been the decision that optimized their own profits in a world driven solely by economic models. Same for hand sanitizer, rice, beans, etc.

The reason they don't do that and just sell out, creating shortages and more panic, is because the risks in terms of lost customer goodwill and potentially state legal action of being perceived to be price gouging are too great.

[FIRE 20/20]

It's Capitalism when I benefit, but price gouging when you do.

[mrmoonymartian]

Prices lead to the rational allocation of scarce resources if we let them. Sometimes we choose not to for ape reasons.

https://www.pnas.org/content/110/6/2070

[maizefolk]

Prices lead to the rational allocation of scarce resources if we let them. Sometimes we choose not to for ape reasons.

https://www.pnas.org/content/110/6/2070

Neat! I didn't realize people tested the ultimatum game in with Chimpanzees before.

Yes, rationally I'd rather pay $10 or even $20 a gallon for gasoline in a crisis but know that if I go to a gas station they'll actually have fuel, rather than continue to pay normal prices but know that if I really need gas for an emergency there may be nowhere with any left to sell.

But people as a whole really REALLY don't like it. Even Uber's surge pricing (which didn't just raise prices to drive down demand but directly increased the supply of drivers when there was a shortage because as prices rose more drivers turned out) was ultimately nerfed because of how much people didn't like it.

[Omy]

But we put up with it without a fight when drugs in the US are priced 1000%+ higher than the rest of the world.

[mozar]

I disagree that people are putting up with price gauging for pharmaceuticals. There are ongoing lawsuits about it. There are groups you can join if this is a topic of concern for you.

[lost_in_the_endless_aisle]

The difference between basic hygiene products and pharmaceuticals is it doesn't take $2 billion and 10 years of clinical trials to approve a new roll of Quilted Northern triple-ply.

[Omy]

Agreed. But why does the US pay 10-20 times what the rest of the world pays? Why the huge price increases for insulin and epipens - items that have been around for decades and that used to be affordable?

[lost_in_the_endless_aisle]

Agreed. But why does the US pay 10-20 times what the rest of the world pays? Why the huge price increases for insulin and epipens - items that have been around for decades and that used to be affordable?

I would not go to far out of my way to defend the pharmaceutical "market" in the US but many of the problems due to various policies and pathological incentives faced by pharma. This summary is useful for re-framing the issue with more clarity; e.g.:

When Mylan decided to sell EpiPens for $300, in any normal system somebody would have made their own EpiPens and sold them for less. It wouldn’t have been hard. Its active ingredient, epinephrine, is off-patent, was being synthesized as early as 1906, and costs about ten cents per EpiPen-load.

Why don’t they? They keep trying, and the FDA keeps refusing to approve them for human use. For example, in 2009, a group called Teva Pharmaceuticals announced a plan to sell their own EpiPens in the US. The makers of the original EpiPen sued them, saying that they had patented the idea epinephrine-injecting devices. Teva successfully fended off the challenge and brought its product to the FDA, which rejected it because of “certain major deficiencies”. As far as I know, nobody has ever publicly said what the problem was – we can only hope they at least told Teva.

In 2010, another group, Sandoz, asked for permission to sell a generic EpiPen. Once again, the original manufacturers sued for patent infringement. According to Wikipedia, “as of July 2016 this litigation was ongoing”.

In 2011, Sanoji asked for permission to sell a generic EpiPen called e-cue. This got held up for a while because the FDA didn’t like the name (really!), but eventually was approved under the name Auvi-Q, (which if I were a giant government agency that rejected things for having dumb names, would be going straight into the wastebasket). But after unconfirmed reports of incorrect dosage delivery, they recalled all their products off the market.

This year, a company called Adamis decided that in order to get around the patent on devices that inject epinephrine, they would just sell pre-filled epinephrine syringes and let patients inject themselves. The FDA rejected it, noting that the company involved had done several studies but demanding that they do some more.

[Boofinator]

The difference between capitalism and price gouging is fair markets.

Some increase in price during a crisis is usually a good thing, in that it reduces hoarding instincts and encourages redistribution (the latter not being very applicable to a pandemic). However, creating a monopoly by buying up all of the supply and then selling for an exorbitant price is clearly the antithesis to free markets and should be punished accordingly. Here's a good (albeit dated) article on Adam Smith's thoughts on the topic:

https://moginrubin.com/antitrust-democracy-adam-smith-right/

[GuitarStv]

However, creating a monopoly by buying up all of the supply and then selling for an exorbitant price is clearly the antithesis to free markets and should be punished accordingly.

Why?

Don't get me wrong.  I see what you're describing as absolutely immoral and wrong, and don't want to see more of it.  But your terminology is fraught with problems here.

Who decides what a fair price is?  The cancer patient, or the company controlling the price of the cancer drug?  How much profit is allowed before it becomes 'exorbitant'?

A free market is a market where prices are determined by unrestricted competition between companies/businesses.  Buying all of the stock available in a free market and creating a monopoly is damaging to the public, but should (eventually) be corrected by competition entering the market and selling for a lower price, shouldn't it?  You cannot advocate for a free market while simultaneously putting controls on that market.  What you're describing there is a controlled, or at best a mixed market.  It stops being a free market when you limit the freedom of actors in the market to act as they wish.  (Again, not saying that this is a bad thing.  To my point of view, a mixed market is the only rational economic policy for a country to follow.  A free market will lead to slaver, monopolies, dumping, etc.)

[ctuser1]

However, creating a monopoly by buying up all of the supply and then selling for an exorbitant price is clearly the antithesis to free markets and should be punished accordingly.

Why?

Don't get me wrong.  I see what you're describing as absolutely immoral and wrong, and don't want to see more of it.  But your terminology is fraught with problems here.

Who decides what a fair price is?  The cancer patient, or the company controlling the price of the cancer drug?  How much profit is allowed before it becomes 'exorbitant'?

A free market is a market where prices are determined by unrestricted competition between companies/businesses.  Buying all of the stock available in a free market and creating a monopoly is damaging to the public, but should (eventually) be corrected by competition entering the market and selling for a lower price, shouldn't it?  You cannot advocate for a free market while simultaneously putting controls on that market.  What you're describing there is a controlled, or at best a mixed market.  It stops being a free market when you limit the freedom of actors in the market to act as they wish.  (Again, not saying that this is a bad thing.  To my point of view, a mixed market is the only rational economic policy for a country to follow.  A free market will lead to slaver, monopolies, dumping, etc.)

+1

Free market = all buyers and sellers have equal bargaining power and 100% transparency.
Efficient market = "Free Market" + no transaction costs.
Market Manipulation = The act of decreasing market efficiency, or making the market "not free".
(I'm going off memory for these definitions. Please feel free to correct me if I am making a mistake anywhere.)

Price gouging is almost always some form of market manipulation. Hoarding up a huge stock to create a monopoly is a classic example of this.

Of course it goes without saying that the libertarians loooooove market manipulation and hate free markets as defined in economics textbooks.

I'm sometimes a little perplexed why so many "liberal" or so-called "left wing" economists defend price gouging.

A good article in LA Times that touch many of these topics:
https://www.latimes.com/business/hiltzik/la-fi-hiltzik-price-gouging-harvey-20170828-story.html

[marty998]

But we put up with it without a fight when drugs in the US are priced 1000%+ higher than the rest of the world.

For a moment I thought you were talking about cocaine.

[Boofinator]

However, creating a monopoly by buying up all of the supply and then selling for an exorbitant price is clearly the antithesis to free markets and should be punished accordingly.

Why?

Don't get me wrong.  I see what you're describing as absolutely immoral and wrong, and don't want to see more of it.  But your terminology is fraught with problems here.

Who decides what a fair price is?  The cancer patient, or the company controlling the price of the cancer drug?  How much profit is allowed before it becomes 'exorbitant'?

A free market is a market where prices are determined by unrestricted competition between companies/businesses.  Buying all of the stock available in a free market and creating a monopoly is damaging to the public, but should (eventually) be corrected by competition entering the market and selling for a lower price, shouldn't it?  You cannot advocate for a free market while simultaneously putting controls on that market.  What you're describing there is a controlled, or at best a mixed market.  It stops being a free market when you limit the freedom of actors in the market to act as they wish.  (Again, not saying that this is a bad thing.  To my point of view, a mixed market is the only rational economic policy for a country to follow.  A free market will lead to slaver, monopolies, dumping, etc.)

Dang it. Meant to say 'fair markets' rather than 'free markets'. I hope the rest of my comment supported my point that fair markets are not always laissez-faire free markets. If you want to call fair markets 'mixed markets' or a mixed economy, that's fine. A mixed economy has always been the case for every society out there that I'm aware of (to one extent or the other).

To specifically discuss the hypothetical cancer drug: If the drug company has a government approved patent on that drug, then they are entitled to charge whatever price they want. Regardless of the price set, the public is undoubtedly better off with the drug than without (assuming the drug is actually effective). It is my opinion that the best tactic that the company can take is charging a profit that will allow to cover costs for that drug (both direct and R&D), some costs for drugs that have not panned out, some costs for drugs they will be developing in the future (which may or may not pan out), and of course some reasonable profit. If this drug has an overwhelming health benefit, the government will even step in to ensure that the company isn't profiting excessively. Once the patent runs out, the drug company will essentially need to reduce prices to compete with generic equivalents (assuming a fair market), so they need to recoup R&D costs in a limited timeframe.

[GuitarStv]

To specifically discuss the hypothetical cancer drug: If the drug company has a government approved patent on that drug, then they are entitled to charge whatever price they want. Regardless of the price set, the public is undoubtedly better off with the drug than without (assuming the drug is actually effective).

I'm not sure that I agree on this point.  If the drug exists, but costs one billion dollars to buy it for treatment . . . then the public is no better off with the drug than without.  There are what?  Maybe four people in the country who can afford the drug?  The company of course could make lots of money off it, but the public is effectively no better.

It is my opinion that the best tactic that the company can take is charging a profit that will allow to cover costs for that drug (both direct and R&D), some costs for drugs that have not panned out, some costs for drugs they will be developing in the future (which may or may not pan out), and of course some reasonable profit. If this drug has an overwhelming health benefit, the government will even step in to ensure that the company isn't profiting excessively. Once the patent runs out, the drug company will essentially need to reduce prices to compete with generic equivalents (assuming a fair market), so they need to recoup R&D costs in a limited timeframe.

It is my observation that many companies charge significantly more than what you believe the best tactic is, and don't appear to give a fuck if patients can afford it.

If patients can't afford it, they die.  So they come up with a way to afford it, no matter the price charged.  There's no market when there's no choice.  Take insulin.  There exists no cost at all to cover R&D.  Insulin was given to the world for free by the researchers who discovered it.  The reason that it's so expensive is that three companies provide 90% of the world's supply . . . and usually they agree to stay out of one another's turf.  They are involved in price fixing.  There exist no (or few) generic alternatives because of the complications of creating a biosimilar drug.  The US government has not stepped in to prevent profiteering on this drug, despite it's overwhelming health benefit.

I guess my concern is that reality doesn't seem to match the idealized version of things that is described in the post above.

[Schaefer Light]

How do you define price gouging?  Is that a 10% increase in price?  50%?  100%?  And who decides?

[Boofinator]

To specifically discuss the hypothetical cancer drug: If the drug company has a government approved patent on that drug, then they are entitled to charge whatever price they want. Regardless of the price set, the public is undoubtedly better off with the drug than without (assuming the drug is actually effective).

I'm not sure that I agree on this point.  If the drug exists, but costs one billion dollars to buy it for treatment . . . then the public is no better off with the drug than without.  There are what?  Maybe four people in the country who can afford the drug?  The company of course could make lots of money off it, but the public is effectively no better.

It is my opinion that the best tactic that the company can take is charging a profit that will allow to cover costs for that drug (both direct and R&D), some costs for drugs that have not panned out, some costs for drugs they will be developing in the future (which may or may not pan out), and of course some reasonable profit. If this drug has an overwhelming health benefit, the government will even step in to ensure that the company isn't profiting excessively. Once the patent runs out, the drug company will essentially need to reduce prices to compete with generic equivalents (assuming a fair market), so they need to recoup R&D costs in a limited timeframe.

It is my observation that many companies charge significantly more than what you believe the best tactic is, and don't appear to give a fuck if patients can afford it.

If patients can't afford it, they die.  So they come up with a way to afford it, no matter the price charged.  There's no market when there's no choice.  Take insulin.  There exists no cost at all to cover R&D.  Insulin was given to the world for free by the researchers who discovered it.  The reason that it's so expensive is that three companies provide 90% of the world's supply . . . and usually they agree to stay out of one another's turf.  They are involved in price fixing.  There exist no (or few) generic alternatives because of the complications of creating a biosimilar drug.  The US government has not stepped in to prevent profiteering on this drug, despite it's overwhelming health benefit.

I guess my concern is that reality doesn't seem to match the idealized version of things that is described in the post above.

Been wanting to get back to this question, but I've been surprisingly busy not going in to work the last few days (in a good way). :)

Drug makers are out for profit. If there is a drug that costs $1 billion, than there are one of two possible scenarios: 1) the price is jacked up far higher than the cost to produce the drug (the hypothetical Dr. Evil scenario), or 2) the price reflects the cost to produce the drug (in the spirit of St. Patrick's Day, the drug is made from the sweat of Leprechauns and the essence of four-leaf clovers).

In the latter case, if the drug truly costs close to $1 billion per application to produce, then it should cost $1 billion, since we are talking some tens of millions of hours of human labor to produce. If patients can't afford it, then yes, to a certain extent, they will die, because the social burden of producing the drug is far higher than the benefit we get by saving the patient.

In the former case, where Dr. Evil is trying to charge $1 billion for a drug that costs $100 to produce, they are really just sinking their own profits, because there would be absolutely zero demand to purchase the drug for $1 billion (I think even the billionaires would balk). Every product on the market has a price that correlates to maximum profit for the company, and this is the price the market usually tries to set, even if there is a monopoly in that market. See, for example, https://courses.lumenlearning.com/wm-microeconomics/chapter/profit-maximization-for-a-monopoly/.

Regarding your comment on insulin: I can't comment too much on specifics, other than to say that certain drugs (like insulin and many other health care treatments) have a captive market, and the government should do a better job of socializing such costs in the United States. As far as the comment that insulin was given to the world for free.... That is not entirely accurate, as the researchers were funded at their universities. They took very little risk in developing the drug, as compared to a for-profit company that develops a drug.