Prices Generally Unaffected by Increased Competition in the Pharmaceutical Industry

The laws of economics state that price is inversely proportional to competition. The more competition there is in an industry, the more options a potential customer has, which means the competitors have to lower their prices to draw in the customers. This phenomenon occurs especially in situations where the products being sold by different companies are similar enough to be interchangeable. For some reason, as investigated in Melody Peterson's L.A. Times article, that doesn't seem to be happening with pharmaceutical prices, even when there are many competitors.

To some extent, it makes sense that pharmaceutical manufacturers charge high prices for the prescription drugs and medical devices that they provide. It takes years and millions of dollars in research and development to create something new, which then has to spend years being tested by the Food & Drug Administration before it is finally approved for sale to the public. Often, by the time a medication has been approved by the FDA, there is only a small amount of time remaining on the patent. So, the developing company has only a few years in which to recoup their investment before other companies come out with generic versions.

The unfortunate aspect of that situation is that the medications and devices being developed are often necessary to cure or treat diseases. That can create an unfair situation: the creating company has the right to choose whatever price they want for their product, and the sick person has no choice but to pay it. That's what makes pharmaceuticals different from a normal product. If a computer company comes out with a new type of device that they have patented and decides to charge exorbitant prices for it, a customer has the choice to either pay the high price or move on without buying the new computer. It doesn't work that way with medicine. If a medication is highly priced, a sick person's only options are to pay the price or not be treated for their illness, which could lead to worse sickness or even death.

You would think that once a patent runs out, generic drug manufacturers would enter the market with a lower-priced product, thus giving customers a choice. The increased competition between the original manufacturer and all of the new generic providers should drive the price down, but it doesn't. Even generic drug producers have been coming out with exorbitantly priced medications. The price is usually slightly less than what a name-brand has it listed for, but nowhere near low enough to make it affordable or even justifiable. One example is a drug called ursodiol, which treats gallstones. The method of creating ursodiol was perfected decades ago, and all patents have run out. The ingredients are not very expensive, yet every drug company is charging somewhere around $5 per pill.

Analysts believe that drug manufacturers are defying the laws of economics for one simple reason: they can. When one company raises their price on a medicine, instead of lowering prices to gain greater demand, the competitors follow suit and raise their prices. In that way, the companies bring in more income, mainly at the cost of medical insurers, which leads insurance companies to charge higher premiums to customers. It's a cycle of rising costs with no end in sight. If a single company stood against the status quo and kept their prices at normal levels, the other companies would eventually have to either lower their prices or go out of business due to lack of demand.

Since none of the companies seem to be following economic principles and standing against the current, many are suspicious of the whole situation. Some fear that the medical suppliers have secretly formed a type of coalition or "trust," an incredibly illegal practice. The grand jury has subpoenaed some of these companies to find out if they had any communication with their competitors prior to making consistent price increases. Analysts believe that a trust could be the explanation as to why drug producers have successfully avoided the laws of economics from catching up to them. In time, a federal investigation may reveal the truth of the matter.

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Uber and Lyft's Low Prices Won't Last Forever

Besides its convenience factor, a user's ability to rate their drivers, and the inherent safety that comes with the app tracking your motion along a pre-determined route, Uber has attracted so many customers in large part due to its subsidized pricing. Over the years, Uber has aggressively pushed to become the leader in the ride-sharing market. To do so, they have often offered prices that are discounted to such an extent that the company sinks billions of dollars into the app each year. While it may seem counter-intuitive to lose money, Uber is actually proceeding exactly as planned: they are focusing first on acquiring customers and forcing out any competitors before they try to turn a profit. Tracy Lien, in her L.A. Times article, addresses Uber's plan and describes how such a monopoly might affect the market.

Uber and Lyft, the most popular ride-sharing services, both know that the fastest way to get loyal customers id to give them a cheaper alternative to taxis. While many consumers still prefer taking a taxi over using one of the ride-sharing apps, most people care more about saving some money. Fortunately for consumers, the ride-sharing apps are not only competing against taxis, they are also competing against each other, which has allowed prices to fall even lower. Eventually, though, as economists have reiterated time and again, when one of the companies gains control of the market, their prices will go up. Maybe it will be slow at first, but it is a law of economics that if one company is the only source of a good or service, consumers are either forced to pay whatever price the company sets or live without it.

Uber is currently valued at over $62 billion, and is by far the market leader, even though they continuously lose money or barely break even in their attempt to grow their market share. While Lyft is in second place, they also have plenty of money to burn, especially after a recent $500 million investment by General Motors. In fact, while Lyft is falling behind Uber in most areas, they have nearly half of the market share in their hometown of San Francisco. It's possible that Uber won't be able to force Lyft out of the competition in the long-run, or they may find that the attempt would be too costly to be economical. However, economists still worry about what might happen if Lyft and other competitors were forced to back out.

Uber just lost a battle in China to become the main provider of ride-sharing services. That loss could lead Uber to focus on the US and Europe more closely and work harder on taking as much market share as possible. Therefore, it is believed that their prices will go even lower in the near future. If they can keep their prices low enough for a long enough time, they may be able to gain enough customers to be unstoppable. Some economists believe that Uber should look toward becoming more valuable to the consumer rather than a cheaper option. The Premier options in ride-sharing apps attract upper-class customers, which could be a substantial source of boosted income for Uber, even if they don't succeed in encapsulating the entire market.

While it is likely that all of the ride-sharers will eventually start raising prices in the future, there are several reasons why they wouldn't suddenly shoot up to exorbitant rates. First, there are anti-trust laws and similar regulations on how much a company can charge for a product or service, especially if that company is one of only a few providers. Additionally, if Uber or Lyft suddenly started charging extremely high prices, their customers would just switch to taking taxis. So, whatever happens with their market share, economic theory would tell us that the ride-sharing apps would steer away from charging more than taxis unless they somehow found a way to remove that competitor entirely, which is unlikely.

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Health Insurance Providers Face Scrutiny Due to Upcoming Mergers

Competition is a major key for keeping product prices low. When that competition is removed, whether by government interference or as a natural effect of the free market, a single company or small group of companies can effectively gain a monopoly on the supplies of a specific type of good or service, which would give them the ability to charge as high a price as they want. It is that situation that many individuals fear may occur in the health care industry. Chad Terhune, of the Los Angeles Times, describes in his article the various mergers currently in the works between health care providers, and the effects that these mergers, if successful, could have on the average American.

For employers and employees alike, these mergers could have huge effects. If all of the pending mergers are approved, then three companies will have control of the majority of the healthcare market, which could lead to a forcing-out of smaller, competing businesses, which could grant them more control. Currently, the companies have the following goals: Anthem Blue Cross Inc. aims to buy out Cigna Corp. for $54.2 billion, Aetna Inc. wants to take over Humana for $37 billion, and the smaller company Centene is looking to acquire Health Net Inc. for $6.8 billion. In the end, Anthem, Aetna, and United Health Group could be at the top of the industry, in California at least.

Many opponents to these mergers fear that the benefits that these health care providers receive by expanding will not be passed on to consumers. In fact, they fear that the new power earned by the companies might lead them to increase rates, forcing customers to pay more or try to find an alternative provider, which would be quite difficult to accomplish in a short time period. They also want to make sure that these large companies have restrictions and extra rules making them focus on improving patient care. Partly in response to the issues raised by opponents, the Department of Justice is having anti-trust officials investigating each of these deals, but in general, state approval determines the end result.

States tend to put the most regulations on the health insurance market. So, in the end, it is usually up to your specific state to decide what conditions the merging companies will have to meet, including holds on premium increases and general network standards. There are, however, existing issues in the system, involving a patient's ability to get insurance at all, as well as the affordability of the patient's final choice. Often, health insurance providers will set a limit on the amount of coverage they will provide to specific patients, depending on the patients' health and medical history. In some instances, this can actually help the common customer. For example, Anthem at one point declared that it would provide a maximum of $30,000 in coverage for knee and hip replacements. Because of this limit, customers were forced to shop around to find a medical practice that would do the procedure for a lower price, which forced about 20% of hospitals to lower prices so as to not lose the business.

Proponents of the mergers hope that similar situations will occur in the future of the health insurance industry. They hope that, as the companies gain more control, they will be able to force medical providers to lower prices to keep the demand constant. They expect that consumers will see a lowering of overall costs, both to hospitals and to the insurance providers as well. For now, there is no real way to determine definitively whether the mergers will be positive or negative for the common American. In all likelihood, the mergers will be approved by the Department of Justice. So, these three companies will almost definitely become the leaders in the industry. The only question might be the level of restriction placed on these companies by each state.

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Major Theater Chains Face Investigations Into Anti-Trust Violations

4/17/15 - Competition is a necessary part of economics. Without competition, a company or group of companies could gain control of a market and charge outrageous prices for goods and services, against which consumers may have no recourse. When competitors arise, such companies are forced to lower prices since consumers will be able to choose. As supply increases, prices must decrease, or the companies risk allowing demand to decrease.

A monopoly is when a single company gains complete control of a market or commodity. A cartel is when a group of companies have control over the market and agree among themselves on what prices to set. A trust is a group of companies that work together to force other, usually smaller, companies out of the market. Each of these is regulated by the federal government and is prevented as much as possible, so as to allow smaller companies the ability to be economically competitive. In his article, Richard Verrier looks into recent investigations into anti-trust violations by several major movie theater chains like AMC, Regal, and Cinemark.

Many complaints and lawsuits have been filed over the years by owners of smaller theaters, who claim that the major theaters have been involved in a practice called “clearance,” in which the smaller theaters are prevented from playing newly released movies. Is this practice considered a violation of anti-trust laws, though? While a Supreme Court decision in 1948 required that movie studios give up ownership in movie theaters, larger theaters still have the financial clout necessary to have some control over where popular movies will be played first.

Thus, the Department of Justice's anti-trust division has been spurred into action in an attempt to determine if clearances are against federal law. To the large chains, it's simply a matter of economic reasoning. The film studios have the supply, and the movie theaters have the demand. If a company like AMC wants a specific movie from the studio, it will effectively be providing more revenue to the studio, because the purchase of the film will involve hundreds of theaters across the country, while the purchase by a small company like IPic Entertainment will only involve a dozen or so. The studio will be more willing to give in to AMC's requests, because AMC provides more business.

With the Department of Justice on the case, we can assume that the matter will eventually be settled. The conclusion of this argument, however, could mean big things for small businesses. If the DoJ concludes that the major theater companies are not breaking any laws, then the small companies will be at a distinct disadvantage. If the DoJ rules that the major companies are breaking anti-trust laws through the use of clearances, then governmental entities may get more involved in economic issues that are out of their jurisdiction. What will it come down to: the natural order of economics, or the imposed order of government regulation?

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