Monday used to be Share Day in my 4-year old's room at day care. Each child could bring a toy to share with his/her friends. Inevitably, some toys would get misplaced or broken. One parent complained about this and, consequently, Share Day is no more.
This is similar to the situation with the pain medicine Vioxx. Researchers were examining the effectiveness of Vioxx in preventing the recurrence of colorectal polyps. Compared to patients taking a placebo, patients taking Vioxx had a higher incidence of heart attack, stroke, and other cardiovascular nasties. You can find more information on this here. As a result, Merck pulled Vioxx worldwide.
This paper by Henry Grabowski at Duke provides some interesting numbers on pharmaceutical R&D. Here are a few that jumped out when I read the paper. Pharmaceutical patents in the US last for 20 years these days, but pharmaceutical companies apply for the patents well before the drug hits the market. In the US, patents can be restored for a few years. As a result, drugs that make it to the marketplace have an average of 12 years of patent life left. Grabowski refers to this as the "effective patent life." It is during this time that the company can use its market power to recoup its R&D investment and opportunity cost of this cash. Here is a quantification of this investment:
"We"Joe DiMasi, Ron Hansen, and Henry Grabowski - link here" found that the representative product" in the late 1990's " incurred out of pocket costs of over $400 million."
This does not include the opportunity cost of investing that money. Assuming a real interest rate of 11%, they estimate that the total cost of bringing a drug to market is over $800 million.
But the vast majority of compounds never make it to market:
"Typically, fewer than 1% of the compounds examined in the pre-clinical trials make it into human testing. Only 20% of the compounds entering clinical trials survive the development process and gain FDA approval."
Substitutes are another matter. Once the patent expires, competitors can develop substitutes - generics. Grabowski estimates that it only takes "a few years and costs one to two million dollars" to bring a generic to market. He also mentions that the probability of success in this case is high.
So, 0.2% of all the newly-developed compounds make it to market. The out of pocket and opportunity costs of these compounds is around $800 million, on average. The company then has 12 years of effective patent life (plus a little more time while the substitutes are being developed and approved) left in which to recoup these costs and to recoup a portion of the costs of developing the ultimately failed compounds.
This does not account for the risk that a new drug on the market will be found to have some nasty side effect that will cause the company to (voluntarily or involuntarily) pull the product from the market. Accounting for this risk would lower the time during which a company could recoup its costs before generics begin chipping away at its market power.
This also does not account for other patented drugs that compete with the drug in question. For example, Vioxx was a competitor to Celebrex. This limits the ability of a pharmaceutical company to recoup its costs.
I understand why Merck pulled Vioxx off the shelf. Call me an idealist, but it's too bad that patients no longer have a choice of whether to use Vioxx. I imagine that some would have been willing to continue using Vioxx and willingly take the risks.
I am a beer snob. I call myself a homebrewer although I haven't brewed since helping two friends brew a stout over two years ago.
The India Pale Ale style of beer was originally brewed in colonial England for British troops in India. Someone figured out that by upping the alcohol content and upping the use of hops, the beer would be preserved during the trip.
My favorite beer, not just my favorite IPA, is an India Pale Ale made by Avery Brewery in Boulder, Co. It is light and very refreshing, and it has an excellent hoppy aftertaste, as any IPA should. Unfortunately, I can't get it in the Mankato area.
If you can get it and you like IPA's, I think you'll like this beer.
Kenneth Todd summarizes some of his research on the effect of pharmaceutical price controls in the Fall 2004 issue of Regulation. It's the second story in this link. Todd and his coauthors of a forthcoming Journal of Law and Economics paper estimate that each 10% reduction in drug prices will lead to a 5.83% decrease in research expenditures on pharmaceuticals. Furthermore, Todd calculates the number of life-years lost in various price control scenarios. For example, a 10% reduction on drug prices through price ceilings would lead to 40.1 million lost life years - 40.1 million fewer years lived by US inhabitants. A 50% reduction leads to an estimated 178.8 million life years lost.
Closer to home, I have high cholesterol and have recently been diagnosed with high blood pressure. My father died of a heart attack when he was 44 and my grandfather (dad's dad) died of a heart attack while in his 50's. Grandpa was overweight but dad was small. Both were heavy smokers. I do not smoke but family history and these conditions make me a walking time bomb.
My doctor has me on Lipitor for my cholesterol and he has prescribed Benicar for my blood pressure. If there were heavy price controls on drug prices back in the 60's - 80's, would any of these drugs have been around? How many substitutes would there have been? What would have been my choices?
Today's price controls on pharmaceuticals will also affect my two sons as they get older. What is moral about giving today's people lower drug prices since my sons will have to pay the price in the future?
Dennis Coates and Brad Humphreys have written a paper on the purported economic benefits of a new MLB team in D.C. Their argument is not surprising - it won't do anything to the local economy and may end up harming it slightly.
The last paragraph of the paper starts thusly:
"A baseball team in D.C. might produce intangible benefits. Residents might have an enhanced sense of community pride and another opportunity to engage in shared experience of civic expression."
Coates and Humphreys emphatically state that this is no reason for public subsidization.
Such external benefits are sometimes held up as reasons for small subsidies for teams and stadiums. But what if the team is horrible? Is there a lot of civic pride around the Tampa Bay area for the Devil Rays? The Arizona Cardinals are playing competitive football this year, but they are still 2 and 4. Baylor University is a fine university, but the Bear football program is a perennial doormat in the Big 12 and it is the only team in the Big 12 south division to *NOT* beat a Big 12 North foe this year. In contrast, the other 5 Big 12 South division teams have yet to lose a game against a North division team. Is there a lot of civic pride for the football Bears?
Of course, some fans may take masochistic pride in their team's second-class standings. Goats anyone?
It's almost amazing how well independent economists agree on the economic impact of teams and stadiums/arenas - they don't do much, if anything, to improve employment and wages and may even slightly harm an economy. This flies in the face of what public proponents of public funding for stadiums trumpet.
The explanation given by economists on why there is no net impact is fairly straightforward. Most spending on sports comes from people in the local economy - it's redistributed spending, not new spending. A similar thing happens with big sporting events like Super Bowls and Final Fours. These events draw lots of people to the host economy, but it also scares away other people who otherwise would have come. There's no net impact.
This does not mean teams should not exist. It's an argument against public funding for teams and the places they play in.
Craig Depken at Heavy Lifting has a series of excellent posts on the situation in Arlington regarding the Cowboys desire for public money to build a new stadium there. His posts will appear at the top of his blog until November 2nd.
For the record, Red McCombs, owner of the Minnesota Vikings, has given up lobbying for a new stadium - at least for the time being.
Hmmmm. LA still doesn't have an NFL team although it supported 2 teams for several years. This is the second largest market in the US. The NFL dictates what teams can play where. Can you say "credible threat"? Can you say "Market Power"? Can you say "Minneapolis Lakers"?
It's fall here in the northlands which means two things - harvesting and infestation! During the summer months when the tall corn is growing around my area, the little beetles have a place to live. But when the combines come out before Halloween to slit the corns' stalks, the summer home of the beetles are destroyed and they find alternate housing.
So they come to my house! I can't sit and eat a meal or play with my kids without being buzz-bombed by what seems like dozens of these bugs. Since I've started writing this piece, I've had one fly onto my monitor and one has decided to hang out under one of my speakers. I counted 8 of them hanging out on my ceiling in my sitting room last night.
There's even one that's been hanging on the wall by my office door for the past week or so. I haven't squished his buggy-butt yet cuz he hasn't bothered me much.
According to this article, the USDA started releasing them. Thanks a pantload, Chet!
I described in an earlier post how the NFL and MLB share locally-generated revenues. Teams share a constant proportion of their local revenues. In MLB, teams share 34% of their "net local revenues" - gross revenues minus actual stadium expenses. The shared revenue goes into a central pool which is then divided equally among clubs.
Suppose we have a two team league and team 1 generates $200 million of net revenue and team 2 generates $100 million of net revenue. Under this plan, team 1 shares $68 million while team 2 shares $34 million. The $102 is divided equally between the two teams giving each team $51 million. The net effect is a transfer of $17 million from team 1 to team 2.
As I mentioned in the arlier post, there is a fear that this shared revenue will just be pocketed by the teams and not spent on players. Not only will this lower overall player payrolls, it may not alter competitive balance. So there is a stipulation in the MLB Collective Bargaining Agreement stating that receiving clubs should spend their receipts on players. If not, they will have to answer to the commissioner.
What's he gonna do? Spank them? Take away their Tonka trucks (an action that really annoys my 4 and 2 year-old sons)?
In any case, asuming the threat is credible, the commissioner's office takes on the responsibility of monitoring team spending on players. I'm betting that the commissioner's office has better things to do with their resources.
I've wondered about ways to restructure revenue sharing systems to reward net revenue receiving teams with a little extra if their teams "perform better", however we want to define it. This would impose an opportunity cost on these teams if they choose to pocket the cash. This could provide an incentive to these teams to spend shared revenues on acquiring more talent.
This, of course, doesn't tell us whether competitive balance is socially desirable.
I found the following blurb in the October 9th issue of The Economist. It's from the "The World This Week" section on page 9.
Credit where it is due
"As if American consumers needed greater access to credit-card debt, the Supreme Court upheld a ruling that Visa and MasterCard violated antitrust rules by banning banks that issue their cards from also offering rival cards. American Express, in partnership with MBNA, immediately annonced plans to launch competing cards."
So the Visa and MasterCard rules allowed them to earn economic profits which are now going to be eaten away by competitors, just as we'd expect when barriers to entry are knocked down.
I was perplexed by the first part of the first sentence... it seems the writer of this piece thinks this may not be a good thing. But it is a good thing. I expect that there will be lower fees paid by banks to credit card companies. This should then be passed on to the customer in terms of lower fees. It also gives consumers a wider variety of choices when it comes to plastic - not from the issuing banks but by the credit card companies themselves.
Question: Why did banks allowed Visa and MasterCard to limit their ability to offer the rival cards in the first place?