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October 26, 2015

Shkreli's Stupid Pricing Move Vindicates Rather Than Indicts Pharmaceutical Markets

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When news broke that a hedge fund guy named Martin Shkreli had purchased Turing Pharmaceuticals and jacked up the price of its product from $13.50 a pill to $750, I must confess to being underwhelmed at all the outrage.

“Doesn’t everyone understand that some smart company will quickly move to take advantage of this huge spread and come out with an affordable alternative?” I thought. Because that’s how markets work.

Well, indeed, just a few weeks later, Imprimis Pharmaceuticals has announced that it will be producing an improved variant of Turing’s Daraprim, the marked-up drug in discussion, and will be selling it for somewhere around $1 per pill. Not only exploiting the unforced error of one of its competitors, but also engendering enormous goodwill in the public square along the way.

I’m guessing Imprimis simply got their news out first, and that in fact several companies moved or are moving to come out with similar attempts to capitalize on Shkreli’s mistake.

In fact, this is how markets work. Companies aggressively competing to meet consumer wants or needs move quickly to exploit their competitors’ mistakes. Consumers win in the end with an ever-increasing array of products and product improvements representing increasing value. Companies that please their customers and avoid disastrous mistakes succeed, and those that don’t fail. Capital (human and financial) that was flowing to the failing company gets more efficiently deployed with succeeding companies. The result is a net plus to the economy.

This is also, by the way, a great example of why corporate executives are highly compensated. Companies need the very best in top management—executives who are smart and prudent and trained to not make stupid pricing and communication mistakes.  The risks of a slipup are enormous, and possibly devastating to a corporation. Turing clearly didn’t have the benefit of top-flight management, and we’ve all seen the problems that resulted. It doesn’t make sense for a top executive to be limited to making only 10 times the salary of a low-level employee when an executive’s mistake can cost the company a million times that of a mistake by an assembly line worker.

Too many times, critics fault markets because they don’t deliver exactly the result the critic wanted exactly when the critic thought it should happen. Martin Shkreli does something colossally stupid and critics say the whole pharmaceutical industry is messed up and in need of even heavier government regulation. Shkreli’s mistake was not an example of market failure or proof of industry dysfunction—it was an example of markets working and doing exactly what they are supposed to do, in real-time: Encouraging risk-taking, punishing miscalculation, and creating opportunity and value.

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