Entrepreneurs face decisions in the free market for any good or service.
Entrepreneurs may enter new markets, leave existing markets, or adjust the quality or price for goods offered in markets. These decisions are based on anticipation of future prices and costs. The entrepreneur assumes the risk of loss for bad decisions and is entitled to the profits realized from good decisions.
Entrepreneurs must compete with other suppliers either on the basis of lower price or improved quality. Copying existing items and offering them at lower prices is a common means of competition. Copying is not stealing as long as the raw materials, labor, and the capital necessary for production belong to the producer.
Monopoly defined as barrier to entry cannot exist in a free market. Monopoly requires an agent to prevent competitors from competing. In the US pharmaceutical market, the government creates monopolies through licenses to sell drugs and patents that make copies of drugs illegal. The monopoly privilege permits the supplier to charge a higher price than would be possible on the free market. The excess profit achievable via monopoly privilege is an unearned rent characteristic of cronyism rather than free market capitalism.
Since monopoly rents are unearned, there must be some justification for monopoly privilege. One justification is the protection against the “theft” of an idea or intellectual property. Stephan Kinsella has made a free market argument against intellectual property. A car can be used to illustrate the argument. A car is property. Property rights are assigned to the car. If a thief stole my car, I would be aware of the theft when the car was no longer available for my use. I cannot use the car because it has been stolen. Ideas do not have this characteristic, so ideas should not be considered as property with property rights attached to them. If someone “copies” a drug molecule, nothing has been stolen. The idea has not been wiped from the inventor’s mind. The copycat does not restrain or impair use of the idea by the inventor in any way. The only loss suffered by the inventor is the ability to realize monopoly rents, but these monopoly rents are unearned and their loss cannot be considered to have been stolen.
Another justification for monopoly privilege is that without the guarantee of monopoly rents, new pharmaceuticals would not be brought to market. This is an assertion without any evidence. It is undoubtedly true that more pharmaceuticals are brought to market with patent monopolies than would be without patent monopolies, but the same can be said for subsidies. The goal of a market is not maximization of transactions, but rather the increase in wealth via mutually beneficial exchanges. If a drug will not be brought to market without the ability to charge monopoly prices, then the market is telling society that consumers have more pressing needs than the new drug.
Another justification is that the costs of satisfying Food and Drug Administration (FDA) requirements to bring new drugs to market are so high that no new drugs would be developed without monopoly rents. This may be true, but this is a reason to abolish the FDA rather than grant monopoly patent privileges. The FDA mission is to ensure the safety and efficacy of drugs. There are examples of drugs approved by the FDA that were not efficacious (Xigris) or safe (Vioxx). Since the value of efficacy and safety are subjective, it is not even possible to ensure efficacy and safety under all circumstances.
Every use of a drug by every patient is an experiment with an uncertain outcome. Neither the efficacy nor the safety of the drug is known ahead of time. We can only estimate efficacy and safety based on past experience. Use of a drug may lead to a good result the first time and anaphylactic shock the next time. Use of drug may lead to good results most of the time and a catastrophic side effect on rare occasion. Aplastic anemia following the use of chloramphenicol, an antibiotic, is a rare side effect occurring 3–6 weeks after dosing and it is usually fatal. Some drugs become less efficacious with repeat use. The efficacy of antibiotics will depend on the sensitivity profile of the offending bacteria which change over time. Adverse side effects of drugs may not become apparent for decades. Daughters of women who received diethylstilbestrol (DES) during pregnancy developed clear cell cancer of the vagina up to 40 years after birth. No matter what standards are used to define efficacy and safety, there will remain outlier risks to the public.
Safety and efficacy cannot be considered in a vacuum. Safety and efficacy must be compared to available alternatives. Patients are far more willing to take a chance on a new treatment if there are no good alternatives. In a world without the FDA, new drugs would have to be significantly less expensive than available alternatives. Pharmaceutical companies might very well have to give new drugs away for free or even pay patients to take them in order to establish a record of safety and efficacy. Over time, drugs would establish a record of safety and efficacy. Drugs with significant advantages to safety or efficacy would permit price premiums for brand recognition. The market should determine the price premium that consumers pay for improvements in quality.
Some drugs continue to be used despite known risks. Some of these risks are dose dependent and require individual monitoring by drug level testing. Some of these risks are idiosyncratic and require periodic testing for toxicity. There is no objective way to balance the potential benefits and uncertain risks of a drug. Individual patients should assume the risks (and costs) in order to realize potential benefits. The market should determine the tradeoff between efficacy and safety.