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Thursday, March 06, 2008

The placebo effect varies by price. Interesting that medicine seems to be among the last to pick up on things that other fields are well-aware of--although the mess surrounding Vioxx and other COX-2 inhibitors saw some discussion of this effect. In this case, I believe students of marketing and economics have known about the "luxury good" effect for some time, where a high price acts as a signal of quality. Amusing finding when considering this finding from this week's news. Anecdotally, I find that even highly-educated people think of pharmaceutical prices as determined by manufacturing costs (or manufacturing plus R&D costs, as PhRMA would like us to think*; or manufacturing plus R&D plus advertising costs, as PhRMA-haters would like us to think).

For near-zero marginal cost (NZMC) goods like drugs, music, movies, etc., that's basically not the case. Pricing is determined by what is somewhat confusingly known as 'what the market will bear.' Of course, all market prices are determined that way by definition, but in this case it means prices are set through a process more like the idealized monopoly from Economics 101 than a perfectly competitive firm. This dynamic explains the rise of PBMs and other attempts to create price-controlling oligopsonies, although such mechanisms have their issues as well.

The disconnect between the way economists and marketers think of pricing for NZMC goods and how the general public perceives said pricing is fascinating. I wonder if there is any literature in the marketing world about the mechanisms for the higher perceived value of higher-priced goods? Certainly the component in the placebo study is strictly the intrinsic effect, but I imagine in the real world there is another factor, namely that higher-priced goods provide more incentive for their manufacturer to market them agressively, particularly given the association between high price and market control which means the advertiser can capture a greater share of the increased volume from advertising.


* See, for instance, the "Today's medicines finance tomorrow's miracles" campaign.


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