question archive Astra-Merck Prices Prilosec In 1995, a new drug developed by Astra- Merck became available for the long-term treatment of ulcers
Astra-Merck Prices Prilosec In 1995, a new drug developed by Astra- Merck became available for the long-term treatment of ulcers
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Astra-Merck Prices Prilosec
In 1995, a new drug developed by Astra- Merck became available for the long-term treatment of ulcers. The drug, Prilosec, represented a new generation of antiulcer medication. Other drugs to treat ulcer conditions were already on the market: Tagamet had been introduced in 1977, Zantac in 1983, Pepcid in 1986, and Axid in 1988.As we explained in Example 1.1 (page 10), these four drugs worked in much the same way to reduce the stomach"s secretion of acid. Prilosec, however, was based on a very different biochemical mechanism and was much more effective than these earlier drugs. By 1996,it had become the best-selling drug in the world and faced no major competitor.
In 1995,Astra-Merck was pricing Prilosec at about $3.50 per daily dose. (By contrast, the prices for Tagamet and Zantac were about $1.50to $2.25per daily dose.) Is this pricing consistent with the markup formula (10.1)?The marginal cost of producing and packaging Prilosec is only about 30 to 40 cents per daily dose. This low marginal cost implies that the price elasticity of demand, ED, should be in the range of roughly -1.0 to -1.2. Based on statistical studies of pharmaceutical demand, this is indeed a reasonable estimate for the demand elasticity. Thus, setting the price of Prilosec at a markup exceeding 400 percent over marginal cost is consistent with our rule of thumb for pricing.
