Tag: pricing

Coffee prices have been soaring in recent months. This applies to the prices of both coffee beans on international markets, coffee in supermarkets and coffee in coffee shops. In this blog we examine the causes and what is likely to happen over the coming months.

As we shall see, demand and supply analysis provides a powerful explanation of what has been happening in the various sectors of the industry and the likely future path of prices.

The coffee industry

The cultivating, processing and retailing of coffee is big business. It is the second most widely traded commodity after oil and around 2.5 billion cups are consumed worldwide on a daily basis. In the UK nearly 100 million cups of coffee a day are drunk, with coffee consumers spending around £4 billion per year on sit-down and takeaway coffees and on coffee bought in supermarkets and other shops for making at home. The average takeaway coffee costs around £3.40 per cup with speciality coffees costing more.

Global production in the coffee year 2023/24 was 178 million 60 kg bags (10.7 million tonnes) and the annual income of the whole sector exceeds $200 billion. Around 25 million farmers spread across 50 countries harvest coffee. The majority of these farms are small and family run. Some 100 million families worldwide depend on coffee for their living.

Brazil is by far the biggest producer and accounts for nearly 40% of the market. A good or poor harvest in Brazil can have a significant impact on prices. Vietnam and Columbia are the second and third biggest producers respectively and, with Brazil, account for over 60% of global production.

Coffee prices are extremely volatile – more so than production, which does, nevertheless, fluctuate with the harvest. Figure 1 shows global coffee production and prices since 1996. The price is the International Coffee Organization’s composite indicator price (I-CIP) in US cents per pound (lb). It is a weighted average of four prices: Colombian milds (Arabica), Other milds (Arabica), Brazilian naturals (mainly Arabica) and Robusta. Production is measured in 60 kilo bags.

Case Study 2.3 on the student website for Economics 11th edition, looks at the various events that caused the fluctuations in prices and supply illustrated in Figure 1 (click here for a PowerPoint). In this blog we focus on recent events.

Why are coffee prices rising?

In early October 2023, the ICO composite indicator price (I-CIP), was $1.46 per lb. By 28 August, it had reached $2.54 – a rise of 74%. Colombian milds (high-quality Arabica) had risen from $1.79 per lb to $2.78 – a rise of 55%. Robusta coffee is normally cheaper than Arabica. It is mainly used in instant coffee and for espressos. As the price of Arabica rose, so there was some substitution, with Robusta coffees being added to blends. But as this process took place, so the gap between the Arabica and Robusta prices narrowed. Robusta prices rose from $1.14 in early October 2023 to £2.36 in late August – a rise of 107%. These prices are illustrated in Figure 2 (click here for a PowerPoint).

This dramatic rise in prices is the result of a number of factors.

Supply-side factors.  The first is poor harvests, which will affect future supply. Frosts in Brazil have affected Arabica production. Also, droughts – partly the result of climate change – have affected harvests in major Robusta-producing countries, such as Vietnam and Indonesia. With the extra demand from the substitution for Arabica, this has pushed up Robusta prices as shown in Figure 2. Another supply-side issue concerns the increasingly vulnerability of coffee crops to diseases, such as coffee rust, and pests. Both reduce yields and quality.

As prices have risen, so this has led to speculative buying of coffee futures by hedge funds and coffee companies. This has driven up futures prices, which will then have a knock-on effect on spot (current) prices as roasters attempt to build coffee stocks to beat the higher prices.

There have also been supply-chain problems. Attacks on shipping by Houthi rebels in the Red Sea have forced ships to take the longer route around the Cape of Good Hope. Again, this has particularly affected the supply of Robusta, largely grown in Asia and East Africa.

New EU regulation banning the import of coffee grown in areas of cleared rainforest will further reduce supply when it comes into force in 2025, or at least divert it away from the EU – a major coffee-consuming region.

Demand-side factors.  On the demand side, the rise of the coffee culture and a switch in demand from tea to coffee has led to a steady growth in demand. Growth in the coffee culture has been particularly high in Asian markets as rapid urbanistion, a growing middle class and changing lifestyles drive greater coffee consumption and greater use of coffee shops. This has more than offset a slight decline in coffee shop sales in the USA. In the UK, the number of coffee shops has risen steadily. In 2023, there were 3000 cafés, coffee chains and other venues serving coffee, of which 9885 were branded coffee shop outlets, such as Costa, Caffè Nero and Starbucks. Sales in such coffee chains rose by 11.9% in 2023. Similar patterns can be observed in other countries, all helping to drive a rise in demand.

But although demand for coffee in coffee shops is growing, the rise in the price of coffee beans should have only a modest effect on the price of a cup of coffee. The cost of coffee beans purchased by a coffee shop accounts for only around 10% of the price of a cup. To take account of the costs to the supplier (roasting, distribution costs, overheads, etc), this price paid by the coffee shop/chain is some 5 times the cost of unroasted coffee beans on international markets. In other words, the international price of coffee beans accounts for only around 2% of the cost of a cup of coffee in a coffee shop.

Higher coffee-shop prices are thus mainly the result of other factors. These include roasting and other supplier costs, rising wages, rents, business rates, other ingredients such as milk and sugar, coffee machines, takeaway cups, heating, lighting, repairs and maintenance and profit. The high inflation over the past two years, with several of these costs being particularly affected, has been the major driver of price increases in coffee shops.

The future

The rise in demand and prices over the years has led to an increase in supply as more coffee bushes are planted. As Figure 1 shows, world supply increased from 87 million in 1995/6 to 178 million 60 kilo bags in 2023/4 – a rise of 105%. The current high prices may stimulate farmers to plant more. But as it can take four years for coffee plants to reach maturity, it may take time for supply to respond. Later on, a glut might even develop! This would be a case of the famous cobweb model (see Case Study 3.13 on the Essentials of Economics 9th edition student website).

Nevertheless, climate change is making coffee production more vulnerable and demand is likely to continue to outstrip supply. Much of the land currently used to produce Arabica will no longer be suitable in a couple of decades. New strains of bean may be developed that are more hardy, such as variants of the more robust Robusta beans. Whether this will allow supply to keep up with demand remains to be seen.

Articles

Data

Questions

  1. Use a demand and supply diagram to compare the coffee market in August 2024 with that in October 2023.
  2. How is the price elasticity of demand relevant to determining the size of price fluctuations in response to fluctuations in the supply of coffee? Demonstrate this with a supply and demand diagram.
  3. How has speculation affected coffee prices?
  4. What are ‘coffee futures’? How do futures prices relate to spot prices?
  5. What is likely to happen to coffee prices in the coming months? Explain.
  6. Why have Robusta prices risen by a larger percentage than Arabica prices? Is this trend likely to continue?
  7. Look at the price of Colombian Arabica coffee in your local supermarket. Work out what the price would be per lb and convert it to US dollars. How does this retail price compare with the current international price for Colombian milds and what accounts for the difference? (For current information on Colombian milds, see the third data link above.)
  8. Distinguish between the fixed and variable costs of an independent coffee shop. How should the coffee shop set its prices in relation to these costs and to demand?

The Competition and Markets Authority (CMA) is proposing to launch a formal Market Investigation into anti-competitive practices in the UK’s £2bn veterinary industry (for pets rather than farm animals or horses). This follows a preliminary investigation which received 56 000 responses from pet owners and vet professionals. These responses reported huge rises in bills for treatment and medicines and corresponding rises in the cost of pet insurance.

At the same time there has been a large increase in concentration in the industry. In 2013, independent vet practices accounted for 89% of the market; today, they account for only around 40%. Over the past 10 years, some 1500 of the UK’s 5000 vet practices had been acquired by six of the largest corporate groups. In many parts of the country, competition is weak; in others, it is non-existent, with just one of these large companies having a monopoly of veterinary services.

This market power has given rise to a number of issues. The CMA identifies the following:

  • Of those practices checked, over 80% had no pricing information online, even for the most basic services. This makes is hard for pet owners to make decisions on treatment.
  • Pet owners potentially overpay for medicines, many of which can be bought online or over the counter in pharmacies at much lower prices, with the pet owners merely needing to know the correct dosage. When medicines require a prescription, often it is not made clear to the owners that they can take a prescription elsewhere, and owners end up paying high prices to buy medicines directly from the vet practice.
  • Even when there are several vet practices in a local area, they are often owned by the same company and hence there is no price competition. The corporate group often retains the original independent name when it acquires the practice and thus is is not clear to pet owners that ownership has changed. They may think there is local competition when there is not.
  • Often the corporate group provides the out-of-hours service, which tends to charge very high prices for emergency services. If there is initially an independent out-of-hours service provider, it may be driven out of business by the corporate owner of day-time services only referring pet owners to its own out-of-hours service.
  • The corporate owners may similarly provide other services, such as specialist referral centres, diagnostic labs, animal hospitals and crematoria. By referring pets only to those services owned by itself, this crowds out independents and provides a barrier to the entry of new independents into these parts of the industry.
  • Large corporate groups have the incentive to act in ways which may further reduce competition and choice and drive up their profits. They may, for example, invest in advanced equipment, allowing them to provide more sophisticated but high-cost treatment. Simpler, lower-cost treatments may not be offered to pet owners.
  • The higher prices in the industry have led to large rises in the cost of pet insurance. These higher insurance costs are made worse by vets steering owners with pet insurance to choosing more expensive treatments for their pets than those without insurance. The Association of British Insurers notes that there has been a large rise in claims attributable to an increasing provision of higher-cost treatments.
  • The industry suffers from acute staff shortages, which cuts down on the availability of services and allows practices to push up prices.
  • Regulation by the Royal College of Veterinary Surgeons (RCVS) is weak in the area of competition and pricing.

The CMA’s formal investigation will examine the structure of the veterinary industry and the behaviour of the firms in the industry. As the CMA states:

In a well-functioning market, we would expect a range of suppliers to be able to inform consumers of their services and, in turn, consumers would act on the information they receive.

Market failures in the veterinary industry

The CMA’s concerns suggest that the market is not sufficiently competitive, with vet companies holding significant market power. This leads to higher prices for a range of vet services. However, the CMA’s analysis suggests that market failures in the industry extend beyond the simple question of market power and lack of competition.

A crucial market failure is asymmetry of information. The veterinary companies have much better information than pet owners. This is a classic principal–agent problem. The agent, in this case the vet (or vet company), has much better information than the principal, in this case the pet owner. This information can be used to the interests of the vet company, with pet owners being persuaded to purchase more extensive and expensive treatments than they might otherwise choose if they were better informed.

The principal–agent problem also arises in the context of the dependant nature of pets. They are the ones receiving the treatment and, in this context, are the principals. Their owners are the ones acquiring the treatment for them and hence are the pets’ agents. The question is whether the owners will always do the best thing for their pets. This raises philosophical questions of animal rights and whether owners should be required to protect the interests of their pets.

Another information issue is the short-term perspective of many pet owners. They may purchase a young and healthy pet and assume that it will remain so. However, as the pet gets older, it is likely to face increasing health issues, with correspondingly increasing vet bills. But many owners do not consider such future bills when they purchase the pet. They suffer from what behavioural economists call ‘irrational exuberance’. Such exuberance may also occur when the owner of a sick pet is offered expensive treatment. They may over-optimistically assume that the treatment will be totally successful and that their pet will not need further treatment.

Vets cite another information asymmetry. This concerns the costs they face in providing treatment. Many owners are unaware of these costs – costs that include rent, business rates, heating and lighting, staff costs, equipment costs, consumables (such as syringes, dressings, surgical gowns, antiseptic and gloves), VAT, and so on. Many of these costs have risen substantially in recent months and are reflected in the prices pet owners are charged. With people experiencing free health care for themselves from the NHS (or other national provider), this may make them feel that the price of pet health care is excessive.

Then there is the issue of inequality. Pets provide great benefits to many owners and contribute to owners’ well-being. If people on low incomes cannot afford high vet bills, they may either have to forgo having a pet, with the benefits it brings, or incur high vet bills that they ill afford or simply go without treatment for their pets.

Finally, there are the external costs that arise when people abandon their pets with various health conditions. This has been a growing problem, with many people buying pets during lockdown when they worked from home, only to abandon them later when they have had to go back to the office or other workplace. The costs of treating or putting down such pets are born by charities or local authorities.

The CMA is consulting on its proposal to begin a formal Market Investigation. This closes on 11 April. If, in the light of its consultation, the Market Investigation goes ahead, the CMA will later report on its findings and may require the veterinary industry to adopt various measures. These could require vet groups to provide better information to owners, including what lower-cost treatments are available. But given the oligopolistic nature of the industry, it is unlikely to lead to significant reductions in vets bills.

Articles

CMA documents

Questions

  1. How would you establish whether there is an abuse of market power in the veterinary industry?
  2. Explain what is meant by the principal–agent problem. Give some other examples both in economic and non-economic relationships.
  3. What market advantages do large vet companies have over independent vet practices?
  4. How might pet insurance lead to (a) adverse selection; (b) moral hazard? Explain. How might (i) insurance companies and (ii) vets help to tackle adverse selection and moral hazard?
  5. Find out what powers the CMA has to enforce its rulings.
  6. Search for vet prices and compare the prices charged by at least three vet practices. How would you account for the differences or similarities in prices?

In September 2023, the Stonegate Group, the largest pub company in the UK with around 4,500 premises, announced that it was going to start increasing the pint of beer by 20p during busy periods. There was an immediate backlash on social media with many customers calling on people to boycott Stonegate’s pubs such as the Slug & Lettuce and Yates.

This announcement is an example of dynamic pricing, where firms with market power adjust prices relatively quickly in response to changing market conditions: i.e. to changes in demand and supply.

Traditionally, prices set by firms in most retail markets have been less flexible. They may eventually adjust to changing market conditions, but this could take weeks or even months. If a product proves to be popular on a particular day or time, firms have typically left the price unchanged with the item selling out and customers facing empty shelves. If the product is unpopular, then the firm is left with unsold stock.

One business that makes extensive use of dynamic pricing is Amazon. Prices for popular items on Amazon Marketplace change every 10 minutes and can fluctuate by more than 20 per cent in just one hour.

Conditions for dynamic pricing to operate

The Amazon example helps to illustrate the conditions that must be in place for a firm to implement dynamic pricing successfully. These include:

  • The capacity to collect and process large amounts of accurate real-time data on the demand for and supply of particular items i.e. the number of sales or the interest in the product.
  • The ability to adjust prices in a timely manner in response to changing market conditions indicated by the data.
  • Effectively communicating the potential advantages of the pricing strategy to consumers.

Consumer attitudes

The last point is an interesting one. As the Stonegate example illustrates, consumers tend to dislike dynamic pricing, especially when price rises reflect increases in demand. A previous article on this website discussed the unpopularity of dynamic pricing amongst fans in the ticket market for live musical events.

The precise reason for the increase in demand, can also have an impact on consumer attitudes. For example, following a mass shooting at a subway station in New York in April 2022, the authorities shut down the underground system. This led to a surge in demand for taxis and this was picked up by the algorithm/software used by Uber’s dynamic pricing system. Fares for Uber cars began to rise rapidly, and people started to post complaints on social media. Uber responded by disabling the dynamic pricing system and capping prices across the city. It also announced that it would refund customers who were charged higher prices after the subway system shut down.

There is a danger for businesses that if they fail to communicate the policy effectively, annoyed customers may respond by shopping elsewhere. However, if it is implemented successfully then it can help businesses to increase their revenue and may also have some advantages for consumers.

The growing popularity of dynamic pricing

It has been widely used in airline and hotel industries for many years. Robert Cross, who chairs a revenue management company predicts that ‘It will eventually be everywhere’.

More businesses in the UK appear to be using dynamic pricing. In a consumer confidence survey undertaken for Barclays in September 2023, 47 per cent of the respondents had noticed more examples of companies raising prices for goods/services in response to higher demand at peak times.

It has traditionally been more difficult for bricks-and-mortar retailers to implement dynamic pricing because of the costs of continually changing prices (so-called ‘menu costs’). However, this might change with the increasing use of electronic shelf labels.

It will be interesting to see if dynamic pricing becomes more widespread in the future or whether opposition from consumers limits its use.

Articles

Questions

  1. Explain the difference between surge and dynamic pricing.
  2. Using a diagram, explain how dynamic pricing can increase a firm’s revenue.
  3. Discuss both the advantages and disadvantages for consumers of firms using dynamic pricing.
  4. How might dynamic pricing influence consumer behaviour if it alters their expectations about future price changes.
  5. There is some evidence that the use of dynamic pricing is less unpopular amongst 18–24-year-olds than other age groups. Suggest some possible reasons why this might be the case.
  6. Using the concept of loss aversion, consider some different ways that a business could present a new dynamic pricing policy to its customers.

When did you last think about buying a new car? If not recently, then you may be in for a surprise next time you shop around for car deals. First, you will realise that the range of hybrid cars (i.e. cars that combine conventional combustion and electric engines) has widened significantly. The days when you only had a choice of Toyota Prius and another two or three hybrids are long gone! A quick search on the web returned 10 different models (although five of them belong to the Toyota Prius family), including Chevrolet Malibu, VW Jetta and Ford Fusion. And these are only the cars that are currently available in the UK market.

But the biggest surprise of all may be the number of purely (plug-) electric cars that are available to UK buyers these days. The table below provides a summary of total registrations of light-duty plug-electric cars by model in the UK, between 2010 and June 2016.

Registration of light-duty highway legal plug-electric cars by model in the UK between 2010 and June 2016

Model

Total registered at the end of(1)

Registrations by year between 2010 and December 2013

2Q 2016

2015

2014

2013

2012

2011

2010

Mitsubishi Outlander P-HEV

21 708

16 100

5 273

 

 

 

 

Nissan Leaf

12 837

11 219

6 838

1 812

699

635

 

BMW i3

4 457

3 574

1 534

NA

 

 

 

Renault Zoe

4 339

3 327

1 356

378

 

 

 

Mercedes-Benz C350 e

3 337

628

0

 

 

 

 

Tesla Model S

3 312

2 087

698

 

 

 

 

Volkswagen Golf GTE

2 657

1 359

0

 

 

 

 

Toyota Prius PHV

1 655

1 580

1 324

509

470

 

 

Audi A3 e-tron

1 634

1 218

66

 

 

 

 

Nissan e-NV200

1 487

1 047

399

 

 

 

 

BMW 330e iPerformance

1 479

 

 

 

 

 

 

BMW i8

1 307

1 022

279

 

 

 

 

Vauxhall Ampera

1 267

1 272

1 169

175

455

4

 

Volvo XC90 T8

813

38

 

 

 

 

 

Renault Kangoo Z.E

785

740

663

 

 

 

 

Porsche Panamera S E-Hybrid

475

395

241

 

 

 

 

Volvo V60 Plug-in Hybrid

410

337

232

 

 

 

 

Peugeot iOn

405

374

368

26(2)

251

124

 

Mercedes-Benz B-Class Electric Drive

303

162

0

 

 

 

 

Mitsubishi i MiEV

252

251

266

1(2)

107

125

27

Smart electric drive

215

212

205

3(2)

13

 

63

Citroën C-Zero

213

167

202

45(2)

110

46

 

Kia Soul EV

193

145

20

 

 

 

 

BMW 225xe

163

 

 

 

 

 

 

Volkswagen e-Up!

154

142

118

 

 

 

 

Mercedes-Benz S500 PHEV

125

157

14

 

 

 

 

Volkswagen e-Golf

123

114

47

 

 

 

 

Chevrolet Volt

119

122

124

23(2)

67

 

 

Renault Fluence Z.E.

79

70

73

7(2)

67

 

 

Ford Focus Electric

22

19

19

 

 

 

 

Mercedes-Benz Vito E-Cell

22

23

23

 

 

 

 

Mia electric

15

15

14

 

 

 

 

Volkswagen Passat GTE

1

 

 

 

 

 

 

BYD e6

0

0

0

50(2)

 

 

 

Total registrations

66 374

47 920

21 504

3 586

2 254

1 082

138

Notes: NA: not available. Registrations figures seldom correspond to same sales figure.

(1) Registrations at the end of a period are cumulative figures. (2) CYTD through June 2013.

Source: Wikipedia, “Plug-in electric vehicles in the United Kingdom”

In 2010 there were nly 138 electric vehicles in total registered in the UK. They were indeed an unusual sight at that time – and good luck to you if you had one and you happened to run out of power in the middle of a journey. In 2011 this (small) number increased sevenfold – an increase that was driven mostly by the successful introduction of Nissan Leaf (635 electric Nissans were registered in the UK that year). And since then the number of electric vehicles registered in the country has increased with spectacular speed, at an average rate of 252% per year.

There is clearly strong interest in electric vehicles – an interest likely to increase as their price becomes more competitive. However, they are still very expensive items to buy, especially when compared with their conventional fuel-engine counterparts. What makes electric cars expensive? One thing is the cost of purchasing and maintaining a battery that can deliver a reasonable range. But the cost of batteries is falling, as more and more companies realise the potential of this new market and join the R&D race. As mentioned in a special report that was published recently in the FT:

The cost of lithium-ion batteries has fallen by 75 per cent over the past eight years, measured per kilowatt hour of output. Every time battery production doubles, costs fall by another 5 per cent to 8 per cent, according to analysts at Wood Mackenzie.

There is no doubt that more research will result in more efficient batteries, and will increase the interest in electric cars not only by consumers but also by producers, who already see the opportunity of this new global market. Does this mean that prices will necessarily fall further? You might think so, but then you have to take into consideration the availability and cost of mining further raw materials to make these batteries (such as cobalt, which is one of the materials used in the making of lithium-ion batteries and nearly half of which is currently sourced from the Democratic Republic of Congo). This may lead to bottlenecks in the production of new battery units. In which case, the price of batteries (and, by extension, the price of electric cars) may not fall much further until some new innovation happens that changes either the material or its efficiency.

The good news is that a lot of researchers are currently looking into these questions, and innovation will do what it always does: give solutions to problems that previously appeared insurmountable. They had better be fast because, according to estimates by Wood Mackenzie, the number of electric vehicles globally is expected to rise by over 50 times – from 2 million (in 2017) to over 125 million by 2035.

How many economists does it take to charge an electric car? I guess we are going to find out!

Articles

Information

Questions

  1. Using a demand and supply diagram, explain the relationship between the price of a battery and the market (equilibrium) price of a plug-in electric vehicle.
  2. List all non-price factors that influence demand for plug-in electric vehicles. Briefly explain each.
  3. Should the government subsidise the development and production of electric car batteries? Explain the advantages and disadvantages of such intervention and take a position.

The Competition and Markets Authority (CMA) has imposed a record fine of £84m on the American pharmaceutical manufacturing company Pfizer and of £5.2m on its UK distributor, Flynn Pharma. The CMA found that the companies charged unfair prices to the NHS for phenytoin sodium capsules, the anti-epilepsy drug.

The price was previously regulated, but Pfizer deliberately de-branded the drug in September 2012 and immediately raised the price to Flynn Pharma by between 780% and 1600%, which, in turn, raised the price to the NHS by nearly 2600%. This made the drug many times more expensive than in any other European country.

The cost to the NHS rose from around £2m per year to around £50m in 2013. Although other generic drugs are available, there would be serious health risks to patients forced to switch drugs. The NHS thus had no alternative to paying the higher price.

Pfizer claimed that the drug was loss-making before it was de-branded. However, the CMA calculated that this did not justify the size of the price increase; that the higher price enabled Pfizer to recover all these claimed losses within just two months.

The usual practice is for pharmaceutical companies to charge high prices for new drugs for a period of time to enable them to recover high research and development costs. Later, the drugs become available as generic drugs that other manufacturers can produce. The price then normally falls dramatically.

Phenytoin sodium was invented many years ago and there has been no recent innovation and no significant investment. But, unlike with many other drugs, there has been no switching by the NHS because of possible dangers to patients. This has given Pfizer and its distributor considerable market power. As the CMA states in its press release:

Epilepsy patients who are already taking phenytoin sodium capsules should not usually be switched to other products, including another manufacturer’s version of the product, due to the risk of loss of seizure control which can have serious health consequences. As a result, the NHS had no alternative to paying the increased prices for the drug.

In conclusion, the CMA found that “both companies have held a dominant position in their respective markets for the manufacture and supply of phenytoin sodium capsules and each has abused that dominant position by charging excessive and unfair prices”.

Articles

Pfizer fined record £84.2m for overcharging NHS 2600% Independent, Zlata Rodionova (7/12/16)
Pfizer fined record £84.2m over NHS overcharging The Guardian, Angela Monaghan (7/12/16)
CMA fines drug firms £90m for over-charging NHS nhe (7/12/16)
Pfizer hit with record fine after hiking price of NHS epilepsy drug by 2,600pc – costing taxpayer millions The Telegraph (7/12/16)
Pfizer, Flynn Get Record Fine on 2,600% Drug Price Increase Bloomberg, Patrick Gower (7/12/16)

CMA publications
Phenytoin sodium capsules: suspected unfair pricing Competition and Markets Authority: Case reference: CE/9742-13, Competition and Markets Authority cases (updated 7/12/16)
CMA fines Pfizer and Flynn £90 million for drug price hike to NHS CMA Press Release (7/12/16)

Questions

  1. What are the arguments for drug companies being allowed to charge high prices for new drugs?
  2. How long should these high prices persist?
  3. Sketch a diagram to illustrate Pfizer’s price for its anti-epilepsy drug before and after it was de-branded. Illustrate the effect on Pfizer’s profits from the drug.
  4. What determines the price elasticity of demand for (a) a drug which is branded and unique; (b) a drug produced by a specific producer but which is generic and can be produced by a number of producers; (c) a generic drug produced by many producers?
  5. How should a regulator like the CMA decide what price a firm with market power should be allowed to charge?
  6. Under what legislation did the CMA fine Pfizer and Flynn Pharma? What is the upper limit to the fine it is able to impose? Did it impose the maximum fine on Pfizer?