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Friday, July 23, 2004

Nationalize Pepsi!

In comments, J.W. Mason argues that because of the monopoly power given by patents, pharmaceutical companies engage in socially wasteful research into me-too drugs Me-too drugs steal some customers (and monopoly profits) from existing drugs but don't cure anybody new. Others (Dr. Angell & Western Mass) argue that drug companies engage in socially useless and expensive marketing, also trying to steal customers from one another. Mason says we ought to look at replacing the patent system for pharmaceuticals with some other way of developing drugs, perhaps subsidizing universities.

This is a better argument than Angell's idea of banning me-too drugs, and I plan to discuss the alternatives to patents proposed by Dean Baker, Dennis Kucinich, and Michael Kremer in a future post.

For now though, I want to repeat my point that the case is at least as good for more government intervention in many other markets besides pharmaceuticals. In particular, let's consider soda, as in Coke and Pepsi.

I think it's pretty clear that soda companies have some monopoly power. Price is way above marginal cost, just like pharmaceuticals. I've read that carbonated water and syrup in fountain soda costs only pennies per glass. Soda companies engage in price discrimination, which is classic monopolistic behavior. In particular, 6-packs (sold to more price-sensitive customers) are cheaper per can than single cans. How do they maintain their monopoly? Trademarks, somewhat similar to patents, help. So do vast marketing budgets, which serve exactly the same function (creating demand) as the critics charge pharmaceutical advertising does. The main factor keeping out new entrants, I suspect, is the high fixed cost of setting up a nationwide distribution network (soda might be a "natural monopoly"). So I think that soda meets J.W.'s criteria of having monopoly power.

Further, there's a lot of monopoly profits to capture. About $100 billion of soda is sold every year. This is less than the amount spent on prescription drugs ($160 billion a year), but not by much. And after we've nationalized the soda companies, we can move on to other industries, like casinos (Casinos also clearly have monopoly power, being illegal in most places. I don't know why Mason denies this. He may be right that candy is competitive though).

Now, the point of intervening in the soda market wouldn't be to lower the price, as with pharmaceuticals. The government probably would want to keep the price high and use soda profits to replace tax revenue, just as many state governments run liquor stores, and most run the lottery and other forms of gambling. And no doubt there's some more sophisticated plan that would be better than simply nationalizing the soda companies. Maybe we should just nationalize the soda distributors, and allow private firms to continue to produce soda and introduce new varieties. Maybe the distributors should just be heavily taxed or regulated, like the electric grid. I'm not sure of the details, but I do know that if this argument (monopoly->high prices, wasteful investment and marketing) is right for pharmaceuticals, it's even more right for soda. And unlike pharmaceuticals, if the government gets it wrong and ends up providing lousy soda, it's no big deal. It's just soda, not life or death.

I mean this partly as a reductio ad absurdum, but I'm also somewhat serious. Why wouldn't this be a good idea? Sure there would be some waste, corruption, and inefficiency, but the same is true of taxes, and government soda profits would allow us to cut taxes.

So, I repeat, why do consumer advocates attack the drug companies, and offer radical proposals for overturning a system that works awfully well, and don't make the same arguments about more mundane industries?

Or on a note that most people will probably take more seriously: why don't they attack doctors salaries? Doctors have plenty of monopoly power, and they account for more than twice as much medical expenditure as prescription drugs. Quotas limit the number of people going to medical school, and the number of interns trained each year. The world is full of doctors who'd be thrilled to come to the U.S. and work for a mere $100,000 a year, but they're not allowed in. To his credit, Dean Baker has criticized these practices, but he's about the only one.

Cost of prescription drugs and doctors: Statistical Abstract, 2003, table 129.
Cost of soda: Statistical Abstract, 2003, table 216, assuming soda costs $0.65/12 oz.


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