The EpiPen price hike story is tailor-made for political outrage. It involves a large for-profit corporation, a life-saving device, triple-digit price hikes, and as usual, poor people and their children are the ones that suffer the most.
For many people, it’s a textbook example of market failure that demands government intervention.
In fact, it’s a perfect example of government failure, and the best solution will be found in freer markets, not increased regulation.
Before we get to the economics of it, it’s worth rehashing the basics of this scandal.
The EpiPen is used to treat life-threatening allergic reactions on the spot. It works by delivering a preset dose of the drug epinephrine. The tool is simple enough that even people who are panicking during an allergic reaction can self-administer the medication they need. It’s a great idea, and it’s been around since the 1970s. Epinephrine has also been around for some time, and is available in cheap generic forms today.
The problem is that one company, Mylan, owns the rights to the EpiPen device, and it has had a near-monopoly on the market. Thus, depending on where you read it, the price of the EpiPen has increased by 400 or 500 percent since around 2007. Given the critical nature of the device for people with serious allergies, these price hikes have not been too popular.
But this is where economics comes into play. Companies don’t raise prices in a vacuum, and precious few could manage a four-fold increase and live to tell about it. If companies are raising prices dramatically and still making money, one of the following must be true:
- Their product is perceived to be so much better than the competition that their customers are willing to pay more. (Think Apple vs. PC.)
- Their product, and the underlying resources are in very short supply, and all companies in the industry are being forced to raise prices as a result. (For instance, this can happen for building materials after a natural disaster takes place.)
- Or more commonly, the company has little to no competition. And the government is keeping the competition out.
The government steps in to regulate the market in order to protect consumers.
These regulations have unintended consequences, and serve to restrict the amount of competition and supply in the market.
Prices rise as a result.
Consumers complain about the price increases, and government introduces subsidies or other programs to offset the cost. Invariably, some consumers will fall through the cracks and find themselves without any access to the product they want or need.