You probably saw the headlines. Daraprim is a small, white tablet that looks a lot like Aspirin. It was created 62 year ago and treats a parasitic infection called toxoplasmosis. Until recently is sold for $13.50. But then Turing Pharmaceuticals acquired the only company that manufacturers the drug and it hiked the price to $750 overnighta 5,500 percent increase!
How can that happen? The drug went off patent years ago. Anyone can copy it and make a generic equivalent. So why dont they?Turns out, the market is very thin. The New York Times estimates that between 8,000 and 12,000 prescriptions get filled annually.
That creates two problems. First the market is probably not large enough to support two competitors. One company supplying the entire market will likely have a lower average cost of production than two or three or four companies sharing the market. If so, you are likely to end up with a natural monopoly, under normal competition. Second, if another company entered the market, there is the problem of how price competition would take place. As health policy analyst Sarah Kliff explains: