Inelastic Demand and Pharmaceuticals
Your company has a patent on a highly efficient injection system for administering epinephrine, a drug used to immediately treat/prevent near-fatal and fatal allergic reactions. The epinephrine drug itself is fairly generic—the patent is for the injection system and no other company has an offer that comes close. You have a monopoly in this market. Currently you charge $60 per “pen” against per-unit costs of $45—a $15 per unit profit. It is well understood that demand for this product is highly inelastic—a near-vertical demand curve such that individuals with allergies need this product in an emergency and thus are insensitive to price. Knowing this, your shareholders suggest doubling or even quadrupling the price to increase profitability. What should you do from (a) an economic perspective and from (b) a biblical perspective?
Notes:
1. The inelastic demand associated with many pharmaceuticals is often more of a policy problem tied to a market failure. Pharmaceutical companies might argue that high drug prices are necessary to cover the high costs of research, development, and manufacturing and without the opportunity to earn monopoly profits, lifesaving drugs and devices would not be invented. But they also have a patent on the drug, which in many cases can be indefinitely renewed. The drug companies have a certain amount of monopoly power. So what to do if one or many patients are price out of the market with death being the result?
2. “Blessed are the merciful, for they will be shown mercy.“ (Matthew 5:7 NIV)
