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HBX Business Blog

Monopoly Pricing: Can a 5,000% Price Increase Be Justified?

Posted by Patrick Healy on September 23, 2015 at 2:56 PM


Who’s the most hated man in America? Well, if you’ve glanced at social media over the past day or two, the resounding answer seems to be Martin Shkreli.

Shkreli is CEO of Turing Pharmaceuticals, a US firm that acquired rights to Daraprim—a drug that treats toxoplasmosis, a parasitic affliction of many AIDS patients—back in August. Since then, the company has decided to raise the price of Daraprim from $13.50 per dose to $750.00 per dose—a price increase of over 5,000 percent! The pill costs about $1.00 to produce.

A former hedge fund manager, Shkreli originally defended his firm’s decision on the basis of profit considerations. So, is Martin Shkreli an evil guy, attempting to make a profit off of sick people that need his product? Maybe. But it’s more likely he just let monopoly power go to his head…

The backlash against the firm brings the idea of monopoly pricing out into the open. The decision of where to price a product is one of the toughest that a firm has to make. For a pharmaceutical company with complete pricing power over its product, it’s usually even more challenging. Aside from the production cost of pills, a drug company must also think about numerous other factors, such as pricing to recover the costs of research and development (R&D), patient willingness to pay, whether government insurance will pay a higher price, and others.

However, one factor that all companies must consider when deciding on a price is equity—is this a fair price to charge for a product that people need? Where Shkreli got it wrong is in severely underestimating fairness considerations when deciding where to price. And because he only focused on profits, he’s paying for it.

Read more about the controversy:

Topics: Business Fundamentals, HBX CORe, HBX Insights