Price Gouging = Capitalism?

If it takes three incidents to confirm a trend, the pharmaceutical industry is most certainly immersed in a trend.

And what is that trend? MyLan CEO Heather Bresch would call it capitalism. When asked why she increased the price of the severe allergy treatment EpiPen from $100 to $600 per unit, she responded “I am running a business. I am a for-profit business. I am not hiding from that.

Let’s paraphrase her sentiment. In essence, Ms. Bresch justified her decision to sextuple drug prices on sick consumers who desperately need her product with the assertion: “That’s capitalism.”

And in the pharmaceutical industry, she isn’t alone. Recently, Turing increased the price of its anti-parasite medication Daraprim from $13.50 to $750.00 a pill. And Valeant Pharmaceuticals more than quadrupled the price of its blood pressure medication Nitropress after it purchased the drug from a rival firm.

That’s capitalism, eh? Apparently, the business executives of these organizations do not believe that they are running afoul of any price gouging laws or regulations by increasing their prices in this manner. Nevertheless, it remains to be seen whether any of these firms can sustain such brutal business strategies over the long run.

After all, it’s difficult to name any organization that has prospered over the long term by increasing sales prices to unaffordable levels while alienating desperate users. That’s why, for instance, Uber voluntarily capped its “surge prices” in Washington DC when the Metrorail public commuter service shut down for emergency repairs.

And Uber went much further than establishing a simple price cap. It announced: “We will work around the clock to keep DC moving tomorrow. We are extending uberPool to the entire metropolitan area during the closures to maximize every car on the road while also keeping prices down for riders. Passengers using uberX to travel with neighbors or co-workers can use the Fare Split option to share the cost of their trip.”

Did Uber’s executives voluntarily take such steps out of an altruistic desire to help their customers? That is one possible explanation. Another explanation, though, is that Uber’s executives may have feared a public backlash over any price gouging activities. That is a very rational concern, and Uber’s executives undoubtedly made a very sound business decision.

In light of that decision, the behavior of Ms. Bresch and her colleagues may strike us as being extremely short sighted. Although price gouging may be legal and profitable in the near term, it cannot help but compel customers to despise their suppliers in the long term.

And no for-profit business can possibly prosper for long when surrounded by stakeholders who hate it. That’s why global banking organizations like Goldman Sachs are dedicating significant resources to public relations initiatives that are restoring their brand reputations after their financial crisis collapses.

To be sure, price gouging firms like MyLan, Turing, and Valeant are undoubtedly for-profit capitalist businesses. But more consumer friendly firms like Uber and Goldman are capitalist businesses too, and they will likely earn more profits than their price gouging pharmaceutical colleagues over the long run.