Monday, September 28, 2015

My Puzzle About Martin Shkreli

Mark Tushnet

Amid all the hullabaloo about the price rise Martin Shkreli sought for the generic drug he acquired, I still haven't seen a good explanation for why he was able to (attempt to) do it. It's reasonably clear that the company he acquired was sitting with a potential pot of money in its hands, because it clearly wasn't selling the drug at a profit-maximizing price. Shkreli saw that, bought the company, and raised the price (presumably, testing where the profit-maximizing point was). My question is, why didn't the company he acquired raise the price itself? (And no, it wasn't a nonprofit, nor was the drug under patent, though the latter point doesn't seem relevant to my puzzle.) Assuming that it's publicly held, would the original company be liable to its shareholders for failing to maximize profits?

Another way to put the point is that this appears to be a real-life example (appropriately adapted) of the joke about Chicago economists who don't bend down to pick up a $20 bill lying on the ground, asserting that it must be counterfeit because otherwise somebody already would have picked it up. Here the original company (and everybody else other than Shkreli) are the Chicago economists, leaving money on the table.

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