Jesse Dudley

Portfolio Assignment
4/30/17
Economics 2020
Price Gouging in the Pharmaceutical Industry

The pharmaceutical industry is an anomaly in the American economic

market. The pharmaceutical industry has higher barriers of entry than almost

any other industry. These barriers come from strict regulation, patents, and

the massive amount of capital it takes to operate a firm. Regulation is in

place to provide the public with safe drugs. The issue arises when

pharmaceutical firms become involved in price gouging that severely hurts

consumers wallets. No drug exemplifies this issue more than Mylans Epipen.

Why does price gouging occur and how can we stop it?

The Epipen is a life saving device that shoots epinephrine into the body of

someone having a severe allergic reaction. The Epipen is a medication that

consumers with severe allergies must have; they will pay for it no matter the

price. When a product can fluctuate price without losing demand it has an

inelastic price demand. Price Elasticity of Demand measures the

responsiveness of demand after a change in a products own price. (Miller, p.

417) Price Elasticity of Demand is quantified by dividing the change in

quantity demanded by the change in price.

The Epipen was first brought to market in the 1980s. In 2007 the

pharmaceutical firm Mylan acquired Epipen, since then the price has risen
rapidly. In 2009, a pharmacy paid $103.50 for a set. By July 2013 the price

was up to $264.50, and it rose 75 percent to $461 by last May. (Parker-Pope

& Peachman, 2016)The price elasticity of demand of Epipen can be

considered inelastic because the 75% increase in price resulted in few

consumers not buying the product. Why is the Epipen so inelastic? There are

few substitutes to the Epipen in the United States; they are not as

marketable, and not well known. Consumers do not have a good alternative

to the Epipen, there is no competition lowering the price. This leaves Mylan

with a monopoly on the product. Epipen users are willing to allocate a

substantial amount of their budget in buying the Epipen because they need it

to survive. The lack of substitutes and the necessity of the Epipen creates a

very inelastic product. Mylan knowingly took advantage of this for profit.

A monopoly is when there is a sole supplier of a good or service which

there is no close substitute. Currently there is one substitute for the Epipen;

it is not well known, and only has a tiny share of the market. This leaves

Mylan with something close to a monopoly on the product. Monopolies are

created when there are barriers to entry. Barriers to entry are restrictions on

who and how someone can start a business. These barriers of entry come

from regulation, ownership of all resources without close substitutes, and

economies of scale.

The monopoly effect in the pharmaceutical industry occurs mostly

because of regulation and economies of scale. The amount of capital it takes

to get involved in the industry is immense. Drugs go through years of

research and development before they are created. New drugs then have to

go through a strict and lengthy regulatory approval process by the Food and

Drug Administration before entering the market. Drugs then often receive

patents protecting them from competitors for a number of years. Drug

companies are regulated themselves and require many licenses to operate.

The federal government gives firms a monopoly on new drugs to

incentivize research and development. Patents gave the original makers of

Epipen a monopoly. Once their patent was up, Epipen was so widely used

that it was hard for a new firm to enter the market. Legislation requiring

schools to carry the Epipen further pushed Epipen into monopoly territory.

Epipen has held such a large share of the market that they dictate the price.

The principles of economies of scale show us that part of the reason Epipen

holds a virtual monopoly was because they hold so much of the market share

it is not cost effective for new competitors to enter the market. The

monopoly created from the Epipen patent led to economies of scale that

made it hard for firms to compete against Epipen. Legislation further pushed

Epipen into monopoly territory.

The drug approval regulatory process is in place to protect consumers

from medications with dangerous side effects. This is consider social

regulation. If the regulatory process wasnt in place, people would be in

danger of taking drugs that have unknown side effects, are ineffective, or

used incorrectly. If drug patents didnt exist, drug makers wouldnt have any

incentive to create new drugs. Patents give firms the ability to spend millions
of dollars on research and development knowing that they are protected

from other firms profiting off recreating the drug.

How can the Government prevent a company like Mylan from price

gouging? It is a difficult situation because government regulation is the

reason for monopolies on drugs. Rather than heavily regulate, the federal

government should incentivize firms to attempt to compete with

monopolized drugs. Firms could receive tax cuts and/or an expedited

approval process. This could help firms enter the market without needing as

high of profit margins. I also think some regulation is necessary. Drug-makers

should not be able to incrementally hike the price on a drug after the patent

has expired beyond a certain price if there are no major competitors. The

United States government should not collude with drug companies to

mandate certain institutions carry a product. If drug prices arent

outrageously high, regular people will be able to purchase them and the

government will not need to mandate them.

Having a monopoly on an inelastic commodity that consumers need to

survive can be a lucrative venture; yet price gouging hurts regular people.

The government has to regulate the industry for our safety. If pharmaceutical

firms were more ethical we would not need to incentivize and regulate the

industry but that fails to be the case.

 Works Cited

Parker-Pope, T., & Peachman, R. R. (2016, August 22). EpiPen Price Rise Sparks

Concern for Allergy Suffers. Retrieved May 2, 2017, from

https://well.blogs.nytimes.com/2016/08/22/epipen-price-rise-sparks-concern-for-allergy-

sufferers/?_r=2

Miller, R. L. (n.d.). The Micro View (16th ed.). Pearson.

 Reflection

Microeconomics has vastly increased my understanding of what keeps

the economy ticking. Taking this class allowed me to analyze different types

of economies, tax systems, and industries. The class has helped me

understand what works in businesses and economies. The thing I am most

grateful for is being able to hear about things happening in the world and

relate them to economics. For example taking this class and following what

has been happening in Venezuela has helped me appreciate our economy.

Knowing about economics will hell be a better future businessman and

citizen.