Upon the invitation of a friend, Prof. Frank Largo, who was the Chairman of Economics Department then, University of San Carlos (USC), Cebu City, I spoke at his university in March 2010. I forgot to blog about it here, posting now.
My title was a play of words on right and left. Private property rights can be subverted by leftist pricing policy.
I was one of four speakers then. The three other speakers were (from left) Dr. Sophia Mancao of DOH Region 7, Mr. Juanito Luna of Prosel Pharmaceuticals Inc. in Cebu, and Prof. Yolanda Deliman, Dean of College of Pharmacy, USC.
My presentation, below.
Audience were Pharmacy and Economics majors, I introduced game theory in Econ. Assume there are two players in a particular drug molecule. Player 1 is a multinational (M1) and player 2 is a local (L2) pharmaceutical company. Before the price control order, M1’s price was P20 a tablet and L2’s prices was P12 a tablet. That is, L2’s prices are 40 percent lower than M1”s.
With price
control, M1 was forced by the DOH and the President to bring down its price by
at least 50 percent, or down to only P10 a tablet. M1 will have 2 options: obey
the order (O), or withraw (W1) the product from the market if it means losses
for the company.
Now L2 loses
its lower-price comparative advantage as M1’s prices are now lower than
its price, and M1 has a “better brand”
image in the public being a global player. So L2 will have different options: If
M1 chooses O, then L2 will either further cut prices (CP) by say, 50 percent
(from P12 to P6 a tablet) or withraw (W2) the product if there is no more
allowance to make huge price cut without incurring losses.
If M1 chooses
W1, meaning the multinational will withraw its product from the market, then L2
will have 2 options: CP if it anticipates that the product pull out by M1 is
only temporary and will choose O later, or retain its price (RP) and get bigger
revenues.
An extensive form
game can be constructed as follows:
From the data
presented above, it seems that the Philippine market went to (10, 6) situation.
Very advantageous to the rich and middle class, but disadvantageous to both M1
and L2, and their employees.
The above is
only for 2-players game form. But there are plenty of players or pharma companies
in each drug molecule category. So we can introduce multinationals 2, 3, (M2,
M3) and so on. The same can be said of the local pharma companies, so there are
players L2, L3, and so on.
Since there
was no product withdrawal by the multinationals, then the right-hand side of
the game form above did not happen. We can only extend the left-hand side of
the game form.
The market was
distributed to (10, 6), (8, 5) and (6, 3) situations but still, actual volume
of drugs sold did not significantly increase, as shown by the above drug sales figures.
Did the poor
benefit from such downward price spiral? A number of data say that the answer
is NO. Because the poor think that P3 is still “unaffordable” for them since
they may have to take the tablet 4x a day, or P12 a day.
For those
with sentiments that the price control policy should cause pain and losses to
the “profit-hungry capitalist multinationals”, the above exercise in game
theory says there is a “law of unintended consequences” and that those who were
possibly hurt more, are local pharmaceutical players L1, L2, L3 and so on.
Unless the said group of people also wanted to see local companies suffer pain
and losses as the multinationals. In which case, their goal may be to see the
collapse of capitalism in the pharmaceutical industry and government can begin
taking over the industry in the form of drug nationalization.
During lunch among the speakers and organizers, the President of the university (4th from left, below) joined us. Frank is 3rd from left, beside me.
See also:
Fat-Free Econ 22: Three Years of Drug Price Control Policy, August 30, 2012
Drug Price Control 37: Four Years of the Policy, August 16, 2013
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