Question

1. According to a recent article in the Wall Street Journal, many drug companies are finding themselves having to lower the net prices of their products (the actual price charged after rebates), even though list prices may be increasing. Novartis AG said its net prices “slipped” in 2018 and would continue to fall in 2019. Other companies reported similar expectations in their net pricing plans. However, demand for pharmaceuticals is typically characterized as being inelastic, that is, consumers tend to be not very price sensitive when it comes to their medications. (For now, let’s assume those price discounts are being passed through to end consumers’ prices or copays--just for simplicity.)
   1. Given what we know about the relationship between demand elasticity, prices and revenues, what does this trend of declining net prices suggest about the elasticity of demand for these products?
   2. How do you reconcile you answer to (a) with the conventional wisdom that pharmaceuticals are price-inelastic?

Answer 1