Drugmakers are abandoning cheap generics
Applying my rudimentary knowledge of microeconomics, the situation with the shortage of cancer drugs seems to be a case of a race to the bottom, as one commenter noted. Here, multiple generic drug manufacturers are competing to win sales contracts by offering the lowest possible price. This can be seen as an example of perfect competition, where firms are price takers and compete mainly on price, driving prices down to the point where they equal the marginal cost of production.<p>However, the problem arises when these prices are driven so low that they no longer cover the firms&#x27; average total costs (including both variable and fixed costs), making it unprofitable for them to continue production. Some firms may choose to exit the market, leading to a reduction in supply. This is where the theory of &quot;shutdown point&quot; comes in: firms will choose to shut down production (at least temporarily) when price falls below the minimum point of the average variable cost curve.<p>The complication in this case is that the reduction in supply is occurring for a product (cancer drugs) that is still in demand. However, as one commenter suggested, it&#x27;s unclear whether the demand would support a higher price.<p>There might be external forces (like regulatory environments, health insurance dynamics, and negotiations by large scale buyers) that are keeping the prices artificially low, preventing the price from rising to a level where it would be profitable for more firms to produce the drugs.