Econ in the News: Morality and Medicines

In mid-August, 32-year-old Martin Shkreli, the CEO of Turing Pharmaceuticals, bought Daraprim, a small little drug that was being sold in the market for $13.50 a dose. After the acquisition, Turing increased the price more than 5000% to $750, leading to large public backlash. It’s tempting to say “moral issues aside” and just attempt to discern the economic parts of this story, and yet it is precisely the moral issues that are so fascinating and integral in this story.

When a business’s bottom line and moral issues collide, social pressures can often alter the outcome.

From a positive economic standpoint, Daraprim occupies the only position in its very small market space (about 10,000 patients who have HIV need it to treat toxoplasmosis), and as a result can act within that space as a monopoly. Compounding the issues for consumers is that their demand for Daraprim is very inelastic; if you want to live, you need that medicine. The fact that Turing Pharmaceuticals raised Daraprim’s price by so much implies that the original price was most likely far below the market equilibrium. From the non-biased, positive economic side of things, the price increase makes sense.

Looking at the issue from a normative perspective brings in the moral issues in play. Is it right for a company to increase the price of their product to somewhere closer to, albeit probably still below, market equilibrium? Is it right for a company to jack up the cost of a medicine that patients need to live? I would personally argue that no, the cost increase was not a good idea ethically, nor a good idea for Turing Pharmaceuticals overall. This is a cautionary tale for companies who make choices in the grey; thanks to the interconnectedness of the world through many types of social media, brazen attempts to increase prices like this area increasingly at risk of backfiring on a company.

Social pressure may not change Daraprim’s market curves, but it certainly carries with it the threat of hurting Turing’s bottom line through boycotts of other medicines they own, reduced ability to hire employees due to negative associations with the company, and more resources devoted towards damage control. For other companies out there who have instituted similar business strategies, including Rodelis Therapeutics and Valeant Pharmaceuticals, the widespread negative backlash to Turing is a wake-up call that may one day see government regulations put on life-saving medicines.

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