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Help quickly please (john james especially)

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The Texas Trigger posted on Thu, Apr 26 2012 8:10 PM

My girlfriend needs help with a paper for her writing class that is due tomorrow, and it pertains to economics. She asked me for help with Sources. However, this is an area I know very little about. The general Idea of the paper is she is arguing that more freedom will lead to more consumer choices, which will increase wealth for everybody. I understand the general idea but as far as sources go, I usually can find specifics, however finding the general seems a bit difficult sometimes. More specifically, she wrote a paper on the differences between generic drugs and brand name drugs (i.e. adderall vs wal-mart brand generic amphetamine salts). It was a purely informational paper. Here are the differences in the drug, and here are the differences in prices.

She must tailor her new paper to say that either these choices are a good thing or a bad thing and expound on why. I almost panicked because I was shocked that i could not come up with a good reason why THIS PARTICULAR choice was a good one, considering they are made at exactly the same factory, and are exactly the same drug yet the prices are way different. Other than moral arguments about why government should not limit trade of any kind, it seems like having only the generic would be a better use of the resources because they produce it cheaper and of literally exactly the same quality.

So, can someone, anyone, able to shoot me some sources on this topic and the general topic of why more choices are better, especially in light of this example? I know this is john james specialty, so John, I summon you!!!!

I would like to point out that I understand the competition that choices produce is good because it will lower prices over-all, and that the patent on the drugs drives prices up. Obviously in the scenario of a single player coming in with a patent and then up-charging via government blessing is bad. So when the new guy comes in with the generic this is good. I guess what I'm having difficulty with is how these arguments are to be performed on paper. I know I will need to pre-determine what the other sides of the argument will be to rebut them. Suggestions on things you have heard before would be helpful. I just literally have never given a lot of thought to the whole generic vs brand name question with regard to choice. Or in other words, I understand the choice, in and of itself, is a good thing because then we have a generic to go to. But why is it good for anyone to buy the brand name? If the brand name were produced by a different company, or even a different factory, this wouldn't be a big deal, but it is literally the EXACT SAME THING, just a different color. Is it that some consumers may have perceived psychic gains from taking the brand name because they are ignorant of the facts? Is it that you may think it gives you a higher status? 

 

I know I am rambling, I just don't know how to put the argument on paper (or verbally) as to why it is Good to even have a generic, other than moral arguments that will likely only appeal to people like us. I am looking for arguments that will help persuade the non-believers who don't mind if government just removes the brand name from the shelves. Anyway, I think you guys catch my drift. Enough of me. Let me hear you! 

Thanks  

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Friedman's 'Free to Choose' would outline an argument.

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Suggested by gotlucky

I'll see what I can do.

 

:EDIT:

Something to recognize is, the unfortunate reality is, there may very well be no use in having a product that is simply sold under two different brands at different prices.  You're right in that competition is what improves quality and lowers price, making us all wealthier.  The market picks the superior product and the inferior one disappears (and frees up those resources to go to more desired uses.)

Now in a free market, it's entirely possible for two identical products to be sold side by side, and have one sell better, even at a higher price.  In fact, it could even be an inferior model, and still sell better at a higher price...as human beings take many things into consideration (even unconsciously) when purchasing.  Packaging makes a huge difference.  Perhaps the higher priced company has found a more effective way of appealing to the customer.  Perhaps there is a lot of brand loyalty at work...meaning people know the brand, they trust it, and they are willing to pay a premium for that "peace of mind"...or possibly just because "these guys always take good care of us" and they feel that purchasing from the company is their way of showing their gratitude and maintaining a relationship.  Or, possibly, the higher priced company just has better marketing, and more people know about their brand of the product.

Or one more possibility is there is actually a market for the two price points.  As I mentioned here, Tim Harford brings up various examples of how even the same company can sell virtually the same product at different prices to maximize on price sensitivity.  (Check that post for links with details).  But basically, it could be the same case here, just that two different companies have developed to meet those different price point demands (i.e. one accomodates the "rich folk" (i.e. the people willing to pay more) and the other accomodates those more sensitive to price (i.e. those who are always looking for the best deal).)

So, there are many reasons why two different brands with two different price points for the exact same product could legitimately exist.  That being said, you mentioned a few times that you were really concerned with this specific case.  In this particular area (pharmaceuticals), it may very well be illegitimate reasons that the two brands exist.  As you mentioned, this industry is rife with IP protections (something I mentioned recently here) as well as third party payers.  It is entirely possible that the higher priced brand only exists due to one or both of these government interventions.  Most likely, it is the latter...people simply aren't paying for the product themselves, so they simply don't care what it costs and won't shop around.  In essence, everyone is in the "rich folk" category where their price sensitivity is very low, because they personally aren't feeling the cost (at least not in any way that they can discern.)

That may very well be the only reason the higher priced brand hasn't disappeared.  Indeed, when John Stossel did a special on the industry he discovered how there could be as much as a 40-100% price difference in the exact same brand of the exact same product....as in, absolutely no difference...in two different pharmacies, located only blocks away from each other.  I'm not positive it was in that special where he mentioned it, but I recall him talking about how he was astounded to find this to be the case, and he recounted how in another report he did on bargain hunters or something like that, they literally followed people from store to store to store looking for the absolute lowest price of everything.  He mentioned how they followed one woman to something like 4 or 5 different stores to ultimately save three cents on a can of peas.  This just doesn't happen in the pharmaceutical industry because the customer is just not the one paying for it.

Now, as for the question at hand...how do you make the case that choice is a good thing, even when it's the same product priced at different levels.  This will not be very clean and neat, because for one, the bottom line answer is not scientific in the economic sense.   As you mentioned, it's more of a psychology answer.  People will voluntarily choose to pay more when they know they can pay less essentially for psychological reasons.  (It makes them feel higher status, it gives them a sense of mental tranquilty and safety that their product is just a little bit better (why else would it cost me more, right?) or they feel a loyalty to the brand, and are simply paying more because of the "relationship" they have.

So you can't really get an economic answer there...except to appeal to the a priori understanding that if a person freely chooses one thing over another, he prefers that one condition over the other.  And personal preference trumps everything.  A farmer could very well decide to farm corn in a field where he could be growing wheat and making more money...simply because he likes farming corn more.  It's his choice.  Obviously the joy of farming corn is more valuable to him than the money he would get from the wheat.

And if you really do want to give the economic answer as to why this is good, you have to make the argument that if something is legitimately turning a profit, it by definition means that the market (i.e. people in general) are better off.  For one thing, this is a hard enough case to make to anti-capitalists who see profit as "evil" and "exploitative".  But for another, it's even more messy in this case because this may very well be a situation in which the profit is not legitimate...that is, the company is only able to turn that profit because of some kind of intervention in the market.  So you can't cleanly make the "profit is good" argument...because it isn't always true, and that's probably the case in this situation...so you've got more explaining to do.

So I'm not completely sure of the best way to proceed in the paper because I'm don't know the details of the assignment, or even what class it is for.  These details would largely determine what direction you can take, and what kind of freedom you have to make different arguments and focus on different things.

Ideally you could make the full argument I outlined here, but I doubt that's feasible for this class or this assignment.  But I could be wrong.  As for resources going into these things, interestingly enough, Free to Choose might be a good one for the general argument of choice being a good thing.

 

I hear what you're saying about "They are just cheating the people who don't know better. Government should release giant public service announcements educating the public or government should induce a price ceiling on the drug, or government should remove brand name form the shelves."  The counter argument to that is twofold.  One, as I mentioned before...they're not cheating anyone...those people aren't the ones paying for it.  The big bad insurance companies are. 

That's the whole point.  It's not that they don't know any better.  It's that they don't care.  And two, think about it...when you go to get work done on your car...do you know everything about how it works and what it needs and the typical prices for various parts and services?  How in the world do you know if you're paying more for some part when you could get the exact same part from the exact same factory for a lower price somewhere else?  Why don't we have government in there regulating prices for car parts?  What about at the grocery store?  Why is there not a government mandated price for that can of peas?  In this store it's $X...but in that store down the street, it's $Y.  IT'S THE SAME CAN!  In fact the delivery truck goes straight from this store to that one and delivers the SAME PALLETS.  That one store is just TAKING ADVANTAGE OF PEOPLE WHO DON'T KNOW BETTER.

Why don't we have government mandated prices on everything?  After all, that's the only way to make sure people aren't be "taken advantage of".

And of course, there are plenty of economic resources to explain why price fixing is harmful.  Economics in One Lesson provides great arguments.  You could surely find them in basic economic textbooks as well.  (Maybe not all, but plenty).

That's is one way to do it.  You could turn it into an argument about the economic viability of price controls.  Other resources on this would be Thomas Sowell's Basic Economics and Applied Economics.  The latter is a great text extrapolating the need to think past "stage 1"...much like Bastiat/Hazlitt's point about "seen and unseen".  It might help you form arguments in the realm of "there are other consequences than just the outcome you think you're creating with mandates."

This is actually probably the most effective way to deal with the arguments you're anticipating.  You're right in that most of the available counter arguments will not appeal to such unthinking minds, but I think this one is probably the best bet.

I'll edit again if I think of something else.

 

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Re sources: I'll try and look into it a bit, but I'm no JJ.  Here is one to start with.  It's not quite what you are looking for but it may provide a useful analogy or just help the brain get moving.

Re prices: There's two things that I can think of that might help.

  1. Price system - prices help direct where resources should go.  Start regulating, and the information people are using is skewed.
  2. Price discrimination - so what?  People are willing to pay different prices for the same thing.  Let them.  The ones that want to be thrifty will be thrifty, and the people who want status will have status.

Btw, I realize you are aware of how patents hurt competition and raise prices.  I'm not sure, but it looked like you were a little dismissive of focusing on that in the paper.  Maybe I misread you?

Good luck!

EDIT: Myths and Facts About Generic Drugs  Even if you don't want to use this article, there's a nice bibliography at the bottom of the article.

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Suggested by jmfred

Idk, man, I did some analysis and it seems like it's gonna cost you. 

 

I figure the MC for JJ is pretty elastic and your Demand is pretty inelastic.
 
Given JJ's monopoly powers, he essentially faces the entire market demand curve because no one can compete with him.
He will produce at Q where MC=MR, but he will charge prices where your demand curve is, and he will make a pretty profit.
 
I think we need to regulate him. I say force him to produce at D=MC. That should allocate society's resources most efficiently.
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if you need to get started on the paper but you dont know why free choices are good, you can start the essay by saying why government regulation is bad. you can also prove your arguments by using logic and principles hard core statistical evidence is not always a good way to prove things.

there are 4 ways of using money:

you can use your own money to buy your own things

you can use your own money to buy someone else things

you can use someone elses money to buy your own things

you can use someone elses money to buy someone elses things.

which of the 4 are the best?

the first one, for you get the most choice.

you know your own standards and since this is your own money you are spending, you will save as much money as possible trying to buy the best things.

for the second point

you can use your own money to buy someone elses things

this is not a good way since yes, you have your hard earned cash, but then you don't know the other person's standards. you might buy something that the other person does not want.

for the third point:

you can use someone elses money to buy your own things, but then since you did not earn your own money, you will be less thrifty (its not ur hard earned cash).

for the fourth point:

you can use someone elses money to buy someone else things

this is the worst of the 4 since it combines points 2 and 3 together.

you will not use your own money, you will not be thrifty, you dont know the other person's standards so the person might not like it. it is very inneficient since youre wasting money on something that the other person might not want, this allows for total mis allocation of money and inefficiency, basically this is what government welfare programs are!

point 1 is the best, so as we can see, the close one is to the individual, the more efficient money is spent

 

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which of the 4 are the best?
 
the first one, for you get the most choice.
 
you know your own standards and since this is your own money you are spending, you will save as much money as possible trying to buy the best things.
 
for the second point
 
you can use your own money to buy someone elses things
 
this is not a good way since yes, you have your hard earned cash, but then you don't know the other person's standards. you might buy something that the other person does not want.
 
Aaaaaand Ricardo rolls over in his grave.

 

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lol what does that mean?

“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence."
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I'd do something about this, but JJ will get you the sources you want, so I choose not to... Just call me a free rider. 

@Wheylous

Lol, someone's been preparing for their micro exam....

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Wheylous replied on Thu, Apr 26 2012 10:09 PM

lol what does that mean?

It means that comparative advantage and the division of labor teaches us that it's not best to use your own stuff. It's best to specialize (given some amount of homogeneity in the products).

Lol, someone's been preparing for their micro exam....

I love micro - it's so straight-forward. Macro is much more hand-wavy.

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gotlucky:
Price system - prices help direct where resources should go.  Start regulating, and the information people are using is skewed.

Of course, and I agree with you whole heartedly. However, I am trying to look at it from the general public's point of view and then work the argument around that. What I anticipiate they will say is, "But the generic is the same, only more expensive. They are just cheating the people who don't know better. Government should release giant public service announcements educating the public or government should induce a price ceiling on the drug, or government should remove brand name form the shelves." I just don't think the whole allocation of resources argument will fly on this one since it is EXACTLY THE SAME PRODUCT, or at least in the actual sense. I suppose Rothbard would say that mere packaging or different name would make it a different good, and he'd be right. But again, I just dont think this will fly in a one-off paper. Not to say I wont use it (or the anti-IP argument) but I want something more they can substantially connect with and understand.  

 

gotlucky:
Price discrimination - so what?  People are willing to pay different prices for the same thing.  Let them.  The ones that want to be thrifty will be thrifty, and the people who want status will have status.

again, I agree. However, this is a moral argument in the same way that saying taxation is wrong is a moral argument. The readers probably do not think taxation is stealing or wrong in any way. So, they probably won't mind using government to "do what is good for the consumer by protecting them from evil marketers and entrepreneurs." 

Should I just run with the whole "buying brand names are worth more to consumers because they are perceived as more valuable in that they provide status?" But then I have to go into the whole subjective price theory. I don't know if there is a way around the moral argument. 

 

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gotlucky replied on Thu, Apr 26 2012 10:20 PM

 

again, I agree. However, this is a moral argument in the same way that saying taxation is wrong is a moral argument. The readers probably do not think taxation is stealing or wrong in any way. So, they probably won't mind using government to "do what is good for the consumer by protecting them from evil marketers and entrepreneurs." 

Should I just run with the whole "buying brand names are worth more to consumers because they are perceived as more valuable in that they provide status?" But then I have to go into the whole subjective price theory. I don't know if there is a way around the moral argument. 

I haven't really thought of price discrimination as a moral argument.  Consider scholarships.  A student could pay full price, or a student can recieve a scholarship of some kind and pay less.  This maximizes sales while still making as large a profit as possible.  Schools need money for expenses, and they have limited spots.  Obviously, they could fill those spots at $1 tuition easily, but then how will they pay for expenses?  The school could charge everyone $40,000 for tuition, but then it runs the risk of not filling all the possible spots.  Or a school can charge one price to one student and another price to another.  It's the same with medication.  If they only produce brand name drugs, then they run the risk of not selling all their product.  If they market them all at generic price levels, they may not make "enough" money.  Or they can charge different prices.

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Neodoxy replied on Thu, Apr 26 2012 10:22 PM

"I love micro - it's so straight-forward. Macro is much more hand-wavy."

Really? I much preffered macro because it was much easier because I found talking about economics on a larger scale much more interesting, and at least the Keynesian model makes sense as opposed to mostly talking about the perfect competition V. pure monopoly neither of which ever realistically occur within the economy. Monopolistic competition is where it's at. 

There's also less funky curve drawing in macro, it's all pretty self-explanatory. Aggregate demand goes down, output falls, you can explain that. 

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Prime replied on Thu, Apr 26 2012 10:26 PM

I am a pharmacist and I dispense thousands of prescriptions per week. I'm a little confused as to where you are going with this, but you need to understand that almost nobody seeks out brand name drugs when generics are readilly available. There doesn't need to be a government education beause it is in the best interest of the pharmacy to dispense you a generic drug. Profit margins are gained with generics, not brand name drugs.

 

 

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<quote>

It means that comparative advantage and the division of labor teaches us that it's not best to use your own stuff. It's best to specialize (given some amount of homogeneity in the products).

</quote>

well i saw the 4 ways of spending from milton friedman, and it made sense to me...

http://www.youtube.com/watch?v=5RDMdc5r5z8

or am i not supposed to use milton friedman's ideas when trying to learn about austrian economics?

yes but then wont you be less careful with money that is not yours? lets say your parents gave you 200 dollars to spend for lunch and only lunch. wouldnt you try to get the best for your self regardless of the price?

and therefore wouldnt using someone elses money to buy something for yourself not as efficient if you used your own hard earned money?

also what does "specialize" mean?

im a beginner with this so explain where i would be wrong.

“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence."
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