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Economics with Network Effects – Martin Shkreli

https://www.pbs.org/newshour/health/controversy-pharmaceutical-company-will-lower-price-aids-drug

 

Martin Shkreli is a name you’ve probably heard of before, whether on the news or at the dinner table, as one of the biggest crooks in the pharma industry. He is infamous for price gauging the cost of Daraprim from $13.50 to $750 in 2015 with his company, Turing Pharmaceuticals. He claimed that the massive price hike is good for the industry as it will fund further research on the drug. However, Daraprim is a standard effective drug that’s been used in over 60 years and has no need for further research. This action leads to massive controversy and backlash from news outlets, the general public, and even high-level politicians in the race for 2016 presidential elections. Hilary Clinton had threatened to draft a plan limiting how much a patient pays for these medications every month. The phrase “all press is good press” certainly does not ring true for Turing Pharmaceuticals for its price gauging, as lawsuits were being thrown at them from every direction, and customers were dropping left and right. In order for the company to stay alive, it had to lower the price of Daraprim.

 

Learning about economics with network effects reminded me of this controversy that occurred. The reservation price of a product is dependent on the interest the public has on the good as well as the benefit a customer has if a fraction of the public uses the good.

To put into equation form, consumers will buy the product if r(x)f(z)  p*.

r(x) – intrinsic interest consumer x has on the product

f(z) – benefit a customer has if z fraction of consumers use the product

p* – the price of good

f(z) will stay constant after the controversy, as Daraprim will still work as intended. However, r(x) will be significantly lower as healthcare providers will not want to buy medicine from such a controversial company. The high cost will encourage providers to buy from alternative pharmaceuticals such as Imprimis, who makes similar drugs for only a fraction of the cost. The lowered r(x) value will force the price of the good to drop as well since Turing Pharmaceuticals will have significantly fewer customers if it maintains its high prices. And that is exactly how Shkreli reacted to the news. Shkreli after facing all the backlash pledged to lower the price of Daraprim to an affordable amount. It’s very interesting to see economics at work from such a simple equation, and there are many other parallels in the business world that can be applied as well.

 

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