Monday, December 31, 2012

Why do Pharmaceutical Drug Shortages Persist?

The New York Times has a very interesting article on the persistence of some pharmaceutical drugs.  As an economist, this is a very perplexing question.  Using the supply and demand model (although pharmaceutical drugs may not be highly competitive), a shortage exists when the quantity supplied is less than the quantity demanded.  The solution to this problem is that prices should rise so that firms have an incentive to produce more of the good and that some consumers will reduce their demand for the good.  For pharmaceutical drugs, the price elasticity of demand is rather low (i.e. inelastic), so even when prices do increase, the amount of decline in demand is rather small as compared to the percentage increase in price.  So we can rule out the consumer as the cause of the persistence in the shortage.

That means that for some reason, firms are not responding as we would expect in a well functioning market.  This could be due to regulations or other market impediments, but there does not seem to be a "smoking gun" pointing to market impediments leading to a persistent shortage.  The article linked at the top of this blog seems to focus on manufacturing issues and problems sourcing ingredients for certain drugs.  Whether this is a management or profit problem is difficult to say given the limited information in the article about specific drugs.

No comments: