Friday, April 21, 2017


In classical economics, the price a corporation charges its customers for a product is the total cost of investment plus normal profit. Stakeholder theorists often argue that some corporations that exorbitant prices are unfair to consumers. The question of price fairness, however, cannot be examined apart from a theory of justice.

Any unjust pricing structure violates the formal principle of justice which states that we are obligated to "treat equals equally and unequals unequally." In any economic relationship, an unfair price structure effects both the buyer and the seller. If either the buyer or the seller receives more than what is deserved, than the other naturally receives less. A fair price, then, is one in which both the buyer and the seller receive exactly what they deserve. This formal principle, however, does not provide insight into which individuals are equal and what it is that they are entitled to as a matter of fairness. Hence, the formal principle requires a material theory of distributive justice.

Any material theory of distributive justice, attempts to establish rules that govern the distribution of pains and pleasures connect the properties or characteristics of persons and the morally correct distribution of benefits under specific conditions. There are two broad kinds of material theories of justice patterned theories and unpatterned theories.

Patterned theories, which are usually espoused by stakeholder theorists, judge the fairness of a distribution procedure based on the distribution pattern evident in the end-state after the distribution actually takes place. Traditionally, material distributions based on utility, need, merit, and equality fall into this category. Today two patterned theories seem to dominate the literature: egalitarianism which espouses an equal distribution of at least some social goods in the end-state; and, utilitarianism which promotes distributions that maximize the public good in the end-state. Hence, the difference between these "patterned" theories is reflected in the kinds of end-state patterns that are deemed morally preferable.

Unpatterned theories of justice, such as defended by libertarianism, reject the notion that any particular distribution found in the end-state is any more fair any other distribution. Unpatterned theories, therefore, focus on the fairness of the procedures that produce an end-state. Hence, any end-state that is generated by a fair procedure is deemed just or fair, regardless of how the benefits and burdens are distributed in the end-state. Stockholder theorists tend to defend unpatterned theories. The idea is that fair distributions are determined by blind market forces and not by beneficent (or malevolent) persons acting as empowered distributors. If you believe that you are being short-changed by the designated distributer, you can claim that that person was being unfair. If things are distributed based on impersonal market forces, there is no one person to blame. Market-based distributions can be unfortunate, but not unfair.

Worldwide, this basic philosophical distinction between patterned and unpatterned distribution schemes has spawned two opposing political philosophies that relate to how governments might regulate corporations: the unpatterned free market model and the patterned regulatory model.


Stockholder theorists embrace the unpatterned free-market model of pricing of everything: products, services, labor etc. The unpatterned free market model espouses laissez faire economic theory, where government intervention in markets is justified only to the extent that it enhances competition. As long as the selling price is determined by free market forces, the price and the resulting end-state distribution is deemed fair. Hence, stock holder theorists who endorse this model pursue procedural justice in public policy. Some libertarians are also committed to opportunity-based and risk-based pricing policies. Opportunity-based pricing sets the price at the highest possible level that buyers are willing to pay, without increasing production volume to the point where it diminishes total profit. In some markets some buyers are

inevitably priced out of the market as the result of opportunity-based pricing. However this is not deemed unfair, since unfairness is thought to arise only under imperfect competition.

Risk-based pricing takes into account the financial and market risk that a company takes by exploiting an economic opportunity in a given market: the greater the risk that a company takes in marketing a given product or service, higher the expectation for profit; and conversely, the lower the risk taken, the lower the profit expectation. Under a risk-based pricing policy, an unfair price violates the formal principle of justice when prices are set higher than the risk exposure can justify. Both opportunity-based and risk-based pricing are blind to the end-state pattern (the actual distribution of their product among consumers), therefore it is impossible for pharmaceutical companies to exercise any social obligations toward price sensitive patients. Moreover, both pricing policies require a bare minimum of governmental interference in the market's natural mechanisms.

Although, according to stockholder theory, corporations exist solely to generate profits and therefore have no direct obligation to serve the public good. They often argue that the public interest is best served by free competition in the marketplace and that at least some temporary monopolies are morally unacceptable.

Stockholder theorists argue that there are two different kinds of monopoly: Natural Monopolies and Artificial Monopolies. Natural monopolies arise when business drives all of its competitors out of the market by offering superior products, more efficient operation, or lucky supply sources. Sometimes natural monopolies arise because of a contagion of incompetent competitors. The only condition here for natural monopoly is that has been forcibly prevented from entering the market. Artificial Monopolies, in contrast, arise where the sole provider of the services or goods gains a favorable market position because the government won't allow anyone else to enter that market to compete with them. Stakeholder theorists often create artificial monopolies where they believe market failure is inevitable, most notably in medicine and education.

Pharmaceutical companies are artificial monopolies that enjoy the benefits of imperfect competition. Libertarians generally reject this kind of tampering with markets and believe that artificial monopolies are the progeny of misguided patterned distribution schemes. Price unfairness in pharmaceutical markets occurs most often when the sellers profit more than could be justified under perfect competition.

Defenders of the patterned regulatory model argue that one cannot evaluate the fairness of a drug pricing policy apart from how it affects both sellers and the buyers in the end-state. Indeed, many distributions that result from opportunity-based and risk-based pricing policies end up depriving, at least some buyers of necessary, life-saving drug treatment. The Patterned Regulatory Model holds that in the distribution of essential goods and services (needs) unpatterned pricing policies are amoral, and therefore are irrelevant to the question of fairness.

Patterned theorists, therefore, prefer cost-based pricing policies which take into account a company's total investment in development, testing, manufacturing, and marketing of the product and then profit margin is set at a certain "reasonable" percentage. Here much depends on how one arrives at this percentage and how one defines a reasonable profit. It is generally agreed, however, that a reasonable price is one in which the price does not greatly exceed the full cost of researching, developing, manufacturing, marketing, and distributing the products. Costs might also a reasonable return for investors.

The inherent problem with cost-based pricing is that companies own this basic information, which sets up legal access barriers. Behind this wall of protection corporations are prone to manipulate costs in order to justify higher profits. So the first step toward instituting cost-based pricing for pharmaceutical products marketed in the United States would be for the government to gain legal access to the records of pharmaceutical companies.

In the United States, where corporate records are regarded as private property, this has been a difficult task. But it is important to acknowledge that pricing policies serve rationing mechanisms for products and services. As a result, products and services in the United States have been, in effect, rationed by the private decisions made by corporate leadership. Corporations typically justify high prices by arguing that they are entitled to be rewarded for the economic risks they assume for investing in research and development. However, many companies have resisted pressure from interest groups and the government to reveal their actual costs.

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