If Drug Companies Could Charge Higher Prices, Why Aren't They?

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Friday, 15 February 2013 06:14

Economists usually believe that companies try to make as much money as possible. This is why readers of an NYT article on plans to reduce Medicare payments for drugs might have been surprised to see the comment:

"Some have speculated that other consumers could end up paying for the cost savings if drug makers raise their prices to account for the lost revenue. 'That money has to come from somewhere,' said Douglas Holtz-Eakin."

This statement implies that drug companies have a group of customers from whom they could now be making more money, but for some reason are choosing not to. This is not consistent with how economists think the economy works. It is difficult to imagine that Pfizer, Merck or any of the other big drug companies are voluntarily choosing to forgo profits. If it is possible for drug companies to get more money by raising prices, then it would be expected that they would have already raised prices.


The piece also includes speculation on why the Medicare drug benefit cost less than had been projected. The main reason is that drug costs in general have risen much less rapidly than had been projected.