Category: Essential Economics for Business: Ch 05

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Is the NHS paying too much for drugs?

A recent report from the Office of Fair Trading has argued that the NHS may be paying up to £500m too much for branded medicines for drugs companies and has recommended reforms to the system. The Pharmaceutical Price Regulation Scheme (PPRS) sets a cap on the profits that any drug company can earn on branded medicines from the NHS and the OFT is recommending changes to the system. They argued that there are “a number of drugs where prices are significantly out of line with patient benefits”.

NHS ‘spending £500m a year too much on drugs’ Guardian (20/2/07)
NHS paying too much for drugs BBC News Online (20/2/07)
Drugs giants to be told to ‘cut prices for NHS’ Times Online (20/2/07)
NHS ‘overspending by millions’ on drugs Telegraph (20/2/07)
Drugs price fixing scheme costs health service millions, says OFT Guardian (20/2/07)
Drugs buddies Guardian – comment is free blog (20/2/07)
Prescribing prices BBC News Online – Robert Peston blog (20/2/07)

Questions

1. Explain the way in which prices for branded drugs are determined.
2. Assess the extent to which the PPRS represents a price-fixing scheme.
3. Discuss the policies that the government could put in place to implement the OFT recommendations.
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Minibar extras

Have you ever had a drink or packet of peanuts from a hotel minibar and then regretted being tempted when you saw the price on checkout? If things like minibars and internet access are so over-priced in hotels, then how can they get away with it? Why do people pay these amounts and what can economics tell us about this pricing behaviour?

Minibar economics MSN Slate (17/2/07)

Questions

1. Explain the reasoning behind hotel pricing strategies for rooms and minibars.
2. Discuss the impact of competition on hotel pricing strategies for rooms and extras like minibars and internet access.
3. Examine the reasons why more companies do not do “advertising campaigns boasting about their what-you-see-is-what-you-get pricing”.
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Why are iPods always the same price?

Try having a browse around the web for the price of an 8GB iPod Nano. How much variation can you find in price? It is almost certainly the case that you will find very little variation in price. So, why is this? Is it that Apple have such dominance over the market that they can force retailers to charge the price they want? Well no, they can’t. However, they do have some interesting marketing strategies that help them maintain the price at the level they want. The article below looks at these and the implications for retailers and the market price of these strategies.

Gadgets for sale… or not MSN Slate (22/12/06)

Questions

1. Explain what is meant by the term ‘price dispersion’.
2. Explain how Apple manage to keep the price of iPods from falling below a certain level.
3. Discuss the impact on competition of using minimum advertised price and marketing subsidies as tools to maintain the desired market price.