Antidote High Tea Price

[Lupita Calvi]

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Context: Our poison control center observed a large increase in the cost of many antidotes over the past several years. The high cost of antidotes has previously been cited as a factor leading to inadequate antidote supply at some hospitals. Continued increases in the cost of antidotes may lead to further reductions in antidote supply and represent serious concerns. This research aims to quantify recent trends in the costs of antidotes in the U.S.

Methods: Antidotes and minimum stocking recommendations were retrieved from published guidelines. RED BOOK Online was used to identify the U.S. average wholesale price (AWP) of each antidote in 2010 and 2015. The AWP in 2010 was adjusted using the U.S. Consumer Price Index to adjust for inflation. The cost of minimum stocking levels for each antidote was calculated and compared between the year 2010 and 2015.

Results: The cost of stocking many antidotes demonstrated a large increase in AWP from 2010 to 2015. Of the antidotes evaluated, 15 out of 33 had greater than 50% increase in AWP and 8 out of 33 had greater than $1000 increase in AWP. Only four antidotes demonstrated decreases in AWP greater than 10% and only one antidote had its cost of stocking decrease in AWP by more than $1000.

Discussion: The price increase over the last 5 years may further hinder the willingness of hospitals to stock recommended antidotes at adequate quantities. This may impede timely treatment of patients, and negatively impact poisoning outcomes.

Conclusions: The price of many antidotes substantially increased in the United States from 2010 to 2015. Strategies should be investigated to help decrease the cost associated with stocking and use of antidotes, including dose rounding, consignment, and regional sharing.

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A prime example of the value of the discipline provided by price theory is the recent discussion of markups and inflation. Recent research has argued that markups account for over half of the increase in the recent inflation. But what does this mean? If you think about this as a causal argument, it seems to suggest that inflation is caused by firms increasing their prices. But prices rising on average over time is the definition of inflation, not the cause of inflation. Also, if we are thinking in terms of causation, markups seem like a weird place to focus attention with regards to inflation. Prices have been rising across the board and across the developed world. Thus, if rising markups caused the rise in inflation, one would need to explain why firms, across the board, suddenly and simultaneously increased markups.

One argument that I have heard is that the evidence of rising markups supports the idea of supply-side factors being the dominant driver of inflation. The argument, so far as it goes, is that supply-side factors primarily drive up costs. In response to these rising costs, firms not only raise their prices, but also use the opportunity to raise their markups. Thus, higher markups imply that inflation is supply-driven. (Brian addressed some of these arguments previously.)

While that story might sound reasonable enough, a basic application of price theory tells us that this is wrong. If markups are rising, it must be because demand is increasing. Rising markups cannot be explained by rising marginal costs. The logic is as follows.

One way to think about perfectly competitive firms (i.e. firms with zero market power) is that they take price as given and they choose how much to produce given the price they observe. They choose the quantity of production to maximize profit. For these firms price will always equal marginal cost if they are maximizing.

Firms with market power get to set their own price. However, since they face a downward-sloping demand for their product, they cannot just set the price at whatever level they want. Their choice of the price will determine the quantity demanded for the product. One way to think about these firms is that they set their price, taking the demand curve as given, to maximize their profit.

For both types of firms, profits are maximized when marginal revenue is equal to marginal cost. However, for the price-setting firm, the price will be above marginal cost (i.e., there is some markup above the marginal cost of production). To see why, consider the figure below.

The curve labeled D in the figure is the demand curve. It captures the typical negative relationship between price and quantity demanded. The curve labeled MR is the marginal revenue curve. Notice that because of the downward-sloping demand curve, the marginal revenue generated by the firm at any given quantity of production is less than the price. It is straightforward to see why. If the price was fixed and the firm increased production by one unit, the marginal revenue from that additional unit of production would simply be the price. However, with downward-sloping demand, the willingness to pay of consumers is decreasing for each additional unit of the product. As a result, the marginal revenue will necessarily be less than the price.

From our discussion thus far, we know two things that are important: (a) marginal revenue is less than the price, and (b) if firms maximize profits, then marginal revenue will equal marginal cost. If price is greater than marginal revenue and marginal revenue is equal to marginal cost, then the price is also greater than marginal cost (i.e., there is a markup).

If we think that rising markups are caused by supply-side disruptions, we can examine this idea in the context of our graph. Notice from the figure that the markup is the vertical distance between the demand curve and the marginal revenue curve at the point at which the marginal cost curve intersects the marginal revenue curve.

Given that understanding, consider what happens as marginal cost increases. On the figure, the curve labeled MC would shift up. The point at which the marginal revenue and marginal cost curves intersect would be up and to the left of the intersection point illustrated in the figure. But as the intersection point moves up and to the left, the vertical distance between the demand curve and the marginal revenue curve gets smaller. This means that the markup gets smaller. Since one moves up and to the left along the marginal revenue curve as marginal costs rise, this necessarily implies that markups get smaller as marginal costs rise. Thus, increasing markups cannot be explained by higher marginal costs.

The intuition for this result is straightforward. If a firm sees its cost for the next marginal unit of production increase by $5, the firm would like to pass on that cost to the consumer. But higher prices reduce the quantity demanded for the product. As a result, the firm cannot pass along the entire additional cost if it also wants to maximize its profit. To maximize profit, it can only pass along some of the increase in marginal cost. The price of the good therefore rises less than the cost and the markup gets smaller.

To summarize, higher markups are inconsistent with rising marginal costs, but are consistent with increases in demand. Given that we are seeing higher markups coinciding with higher inflation, this suggests that the recent bout of inflation has been demand-driven. (A conclusion we have come to before.)

Now, in reality, it is likely that both marginal costs have been rising (due to supply-side factors) and demand has been increasing due to expansionary monetary policy. Nonetheless, the fact that we see higher markups suggests that the effects of the demand-side factors are larger in magnitude.

Great post. The intuition for the effect on the mark-up is stark. In this model, the only way price can increase in greater proportion than the marginal cost--increasing the mark-up--is if the firm's producing where marginal revenue is negative.

I've watched the Supply Side/Demand Side inflation debate since Krugman and Summers argued about it several years ago. Given that China has now been open for months and prices are still rising, let alone not decreasing, provides some firm evidence that it was demand all along.

Over the last several years, the economics profession has embraced something called the \u201Ccredibility revolution.\u201D The idea is that we now have empirical tools that allow us to test for causal inference. These tools give us the ability to identify the causal effect of some policy or some variable on some outcome. These are no doubt valuable tools. However, a byproduct of this revolution has been the devaluation of economic theory (if you don\u2019t believe me, check in on the market for theorists). For some, this so-called credibility revolution has created the impression that one can simply let the data speak.

Perhaps the primary value of price theory is that it is an antidote to bad arguments \u2014 or maybe not bad arguments, but rather ideas that do not hold up well under closer scrutiny. Price theory disciplines one\u2019s thinking.

This is true no matter the question. For example, people often ask why I write so much about both price theory and macroeconomic topics. After all, isn\u2019t price theory about microeconomics? My answer is largely what I wrote in the last paragraph. Price theory disciplines one\u2019s thinking, even for macroeconomic questions. I often lament that the microeconomic foundations of modern macroeconomics aren\u2019t the same as price theoretic foundations. But that is another post for another day. Today is better spent using price theory to examine a topic currently in the news.

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