Monday, March 22, 2010

Why are Rare Disease Drugs Priced So High?

One of the things we discuss in a Prin. of Micro course are economic costs, and one of the best known economic costs is called economies of scale. Basically a firm exhibits economies of scale when the firm increases its output and its per unit total costs decrease. So as the firm scales up it's production its average total costs fall. The reason that firms exhibit economies of scale is because they have significant amount of fixed costs.

Knowing about economies of scale can then help us see why drugs for rare diseases are priced so high. Firms are interested in recouping the significant fixed costs of the drugs and with very few customer's to sell to, they have very high average total costs. If they want to make a profit, then the price would have to be above those high average total costs. While the firm may set prices equal to its marginal cost, this would typically lead to both short-term and long-term losses.

For additional information, see this article on rare diseased patients and pricing.

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