Fixed Costs vs. Marginal Cost
Richard Epstein, law professor at the University of Chicago has a new book "Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation." He has a commentary ("What's Good for Pharma is Good for America") in the Boston Globe, based on his book:
"Pharmaceutical firms still must recover their huge front-end costs, which can run over $1 billion for a new drug, over an ever shorter useful patent life. In addition, their successful drugs must generate additional revenues to cover the predictable flops. Yet companies need to charge someone for the initial costs of production, not just for the small cost of producing additional pills. Any system of direct price controls will dry up the capital needed for innovation."
See a previous post on this topic, where I mentioned a scence from the TV show "West Wing" about protecting pharmaceutical patents. First guy: "Those pills cost them 4 cents to make." Second guy: "That's not true. The second pill costs them four cents, the first pill costs them $1 billion dollars." He must have read Epstein's book.