Author Stephen J. Dubner analyzes the economics of drug dealing in the most Freakonomics way possible, comparing the capitalist tendencies of Walgreens with your friendly neighborhood gang of crack dealers. He also explains how drug stores like Walgreens are able to get away with marking up their generic drugs as much as 1,000 percent, exploiting informational asymmetry to rip off those who don’t know any better. Dubner’s latest book, co-authored by Steven D. Levitt, is called When to Rob a Bank.
Stephen J. Dubner: In our first book Freakonomics we wrote about the economics of a crack-selling gang in Chicago. And it was really fun and interesting because we have these assumptions that if you sell drugs, you become a millionaire. And it turns out that the average criminal, drug-selling gang is set up kind of like a franchise, kind of like a McDonald’s really. And that if you own 10 McDonald’s, you do pretty well; you make good money. And if you’re a manager at one you do okay. But if you’re an employee at one, you know, you make very little money. And it turns out that’s the way a drug gang works. That the vast majority of the profits are concentrated at the top. And so we made the argument that, you know, the average crack dealer isn’t, you know, they’re not very well off and the average crack dealer lives at home with mom and often has a second job at a place like McDonald’s. Well if crack dealers could take lessons from their legitimate drug-selling counterparts, they could do a lot better. So here’s what I mean by that.
Generic drugs, we think — most people seem to think because they’re generic, they’re priced the same. That seems to be kind of the way we think it should work. But as it turns out if you look at the pricing data on generic drugs across different companies, retailers, that sell it, there are instances where I could go to a Walgreens and buy a bottle of, you know, pills, generic — let’s say a statin — and it would cost about $110. And the same, exact bottle of pills at a different place like a Sam’s Club or a Costco would cost literally about $10 or $15. So a markup of like 1,000 percent for the same product that is sold by two companies that look pretty similar and that are generic, moreover. So when you look at this data it’s just shocking. You think how can this possibly be? Not only how can they get away with it? I mean anybody can charge anything they want. Nobody has to buy it, but why would people buy it? And it turns out the reason is very simply that most people who get their, buy their prescriptions in a given place, especially a lot of older people who you get more drugs as you — you buy more drugs as you get older and you’re more on a kind of plan. They just kind of make the assumption that a generic pill is going to be priced the same from one to the next. But it turns out there’s massive, massive disparity in that.
So really, you know, Walgreens is way better at dealing drugs than drug dealers are if the goal is profit maximizing. And I think that even though the people who are just selling at the counter at Walgreens, they are I’m sure not making very much money. You know the shareholders of Walgreens appreciate that a firm like Walgreens is really good at dealing drugs and profit maximizing. So from an economic perspective you have to applaud them. From a fairness perspective, you have to decry them. On the other hand that’s what capitalism is about. It’s about, you know, caveat emptor, you are free to shop around. And if someone can take advantage of what’s called information asymmetry, right, people on different sides of a transaction — I know a lot more about this price than you do — they can exploit it. That’s what’s good about the digital revolution is it makes information asymmetry much harder to maintain. So I don’t know if such an app exists, but a good one would be a very, very, very, very simple price comparison for generic drugs. And it would presumably, off the bat, save, you know, elderly Medicare patients billions of dollars within a month. Of course it would cut into the corporate profits of those shareholders, but that would work.