What Drug Dealers Can Learn From Walgreens, with 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 ten 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.

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