Saturday, September 23, 2006

Gadfly takes requests, part II - Wal-Mart and drug prices

The second request involved this article about Wal-Mart's plan to charge $4 for about 300 generic drugs. Again, a hearty "Bravo." This is basically a case of Wal-Mart doing what it does best:
"Even company critics have praised the plan, conceding that it represents a case of the giant retailer using its size and ability to wring out costs to improve the lives of regular Americans. . .

As it has for dozens of consumer products, Wal-Mart reduced prices of generic prescription drugs by attacking the few remaining pockets of inefficiency in its operations. For example, it cut out third-party distributors that stood between the chain and drug manufacturers. . .

The company also introduced rapid, automated machines into its pharmacy distribution centers that had long relied on workers to fill orders. In doing so, Wal-Mart reduced the amount of time that costly drugs sat in warehouses, rather than on store shelves where they could create revenue. 'It is not glamorous,' said Bill Simon, an executive vice president at Wal-Mart. 'It’s pennies at a time.'"
The generic drug market is already incredibly competitive at the manufacturing level; it's great to see Wal-Mart bring some old fashioned market pressures to bear at the distribution end of the market. Hmm, how long will it be before we hear calls of "unfair competition," since smaller pharmacies likely wouldn't be able to benefit from (and then pass along) similar economies of scale? Maybe the company's critics will skip this one. . .

Let me take the opportunity, by the way, to draw a distinction between these generic medicines and newer ones that are still under patent protection. Basically, we have to be willing to stomach high drug prices for the first 10 years or so that treatments are on the market. That's the price we as a society pay for the remarkable amount of money that is spent on medical research and development each year. These investments have no guarantee of return, and very often wind up amounting to no benefit for the companies involved. Limit the ability to earn economic rents during patent protection periods, and the level of resources devoted to new treatment development will drop.

As for those drugs whose patents have expired, however, let competition drive down the prices as far as possible.

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