Yes, it would. But despite this effect, the United States would almost certainly be better off with a moderate level of bargaining/price control than it is under the current hands-off regime. Why? I count at least four distinct reasons.

First, a point made by Lackdawalla and Sood is that the profit effects of constraining a monopolist’s price are second-order. That is, if you look at a drug company’s profits as a function of the price it charges, they look like Figure 3, with the company at the top of the curve. Pushing the company slightly to the left has approximately zero impact on profits, precisely because it starts at the maximum, where the curve is flat. What’s going on here is that the profits lost on existing sales are almost fully offset by the profits on additional sales.

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What this means in turn is that the negative effect on innovation is small if prices aren’t pushed down a lot, while the consumer gains are first-order. Some price bargaining is always welfare-improving.

Second, the standard picture in Figure 1 in effect assumes that a drug is completely de novo, not a perhaps somewhat better substitute for an already existing drug. This is clearly a bad assumption in many cases; if a drug is introduced to snatch away rents from an existing, similar drug – people used to call this a “me too” drug, although we’re going to need a new name — the gains from its creation will be smaller. Indeed, it’s often argued that pharma companies basically develop too many drugs, wasting resources on what amounts to unnecessary duplication. To the extent that this is true, discouraging some innovation isn’t a bad thing.

Third, the consumer surplus calculation assumes that consumers actually pay for the drug. In fact, many drugs are paid for by insurers – which is necessary, because like much of modern medicine the cost if you need it is far beyond most people’s ability to pay out of pocket. But this means that the price someone is willing to pay may greatly exceed the value to the patient. In general, the interaction of drug insurance with monopoly pricing creates potentially huge distortions in both drug development and drug use, reinforcing the case for bargaining.