An Untreated Case Of Market Failure

Jeremy A. Greene is alarmed by the cost of certain generic drugs:

Drugs previously available at pennies per pill now cost hundreds of dollars per bottle. And not just esoteric, small-market drugs, either: the antibiotic doxycycline, a workhorse drug for common infections from sinusitis to pneumonia, cost $20 per 500-count bottle last October. Last month, the average price for the same supply was $1,849. For a drug initially approved by the FDA in 1967, the price hike seems mystifying.

How is this possible?

In the generic drug industry, market failure occurs when a crowd of different companies that once competed to sell a drug like doxycycline ditch it to pursue more profitable drugs, leaving just one generic supplier—or a new gray-market monopoly able to raise prices just like brand-name manufacturers. This happens in part because generic companies are drawn toward the market exclusivity of newer drugs when they come off patent, in part because of bottlenecks in the supply of precursor chemicals, and in part because of shrinking margins in the production of older generic drugs. The stampede leaves the supply of many older but essential medicines in the hands of just a few suppliers, whose production lines are unprepared to deal with surges in demand, leading to shortages of key pharmaceutical agents needed for the treatment of cancer, pneumonia, and heart disease, as well as for basic anesthesia. Prices eventually recede—but by then, usually, other drugs are seeing similar cost surges.