How will this new policy from Wal-Mart affect the demand for brand name drugs and will this policy affect total revenue? Consider the elasticity of demand for generic drugs. Wal-Mart claims up to a 70% savings for consumers on some drugs, so where does Wal-Mart benefit? What are some possible negative repercussions for such a policy?
Tuesday, September 26, 2006
Wal-Mart Cuts Generic Drug Prices
You may have seen this on the news last week, but Wal-Mart has just cut prices on some generic drugs to $4 for a 30-day supply. Here are some good questions posed by Sarah:
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6 comments:
The demand for brand name drugs will go down with the cut in prices of generic drugs. Some people will substitute the brand name drug they usually buy for a generic brand that will save them a good amount of money. This drop in prices will increase Wal-marts total revenue because they will sell more generic drugs. The generic drugs have an elastic demand, therefore as price of the generic drugs go down total revenue will increase. As the artcile says Wal-Mart can often buy the generic drugs in bulk for less than the $4 cost, so they would still be making a profit on the drugs. Some negative aspects of this price drop could be the overuse of many generic drugs since they are so cheap to buy. Wal-mart could also put some small drug stores out of business since they can afford to sell their generic drugs for a cheaper price.
Taylor Pike
By Walmart selling generic drugs at a discounted price, this will make the demand for the regular brand name drugs decrease, because people can now buy a drug of close quality for a much cheaper price. The market of drugs would be inelastic, because if someone were sick, they would be willing to pay more money if price increased to overcome their illness. Some of the possible negative repercussions for this discount could be that Walmart could start to generate so much revenue from this discount, that they shift the resources of other products towards drugs. This could lead to Walmart slowly evolving into a primary drug store versus a store that has equal preferance to every product.
-Schulz
While I agree with both Taylor and Nick I think that it should also be noted that not only did Wal-mart lower their prices, but Target did as well. Competition is what leads to better deals for the consumer. In this case whether you prefer to shop at Wal-Mart or at Target makes no difference since they offer the same Generic Drugs. Both of these companies are still making money off of the drugs, and I'm not quite so sure that Generic Drugs opperate like a normal good. People need the medicine whenever they get sick, I know that just because drugs are 4 dollars now im not going to go out and buy a bunch of Drugs. What I'm basically trying to say is that I think this could end up hurting the company. People will still buy the same amount of drugs, since the good is inelastic, but now Wal-Mart and Target are making less money off of each customer. They probably thought that they would be able to take customers away from places like Wallgreens, CVS, and Kroger, and this might have worked, but with Target following in the footsteps of Wal-Mart so quickly I think the others will be quick to do the same.
-james c
When Wal-mart cuts down on the price of generic drugs so drastically, the demand of the other brand name drugs will decrease significantly. People can basically get the same drugs for fractions cheaper. Wal-mart is slowly exiling the other brand names off of the market and soon the other brands will go bankrupt unless they can match wal-mart's low prices. This somewhat can lead to a monopoly by wal-mart because the other companies probably can't afford to lower their prices this much and this will lead to Wal-mart gaining a large majority of the customers. The low prices set by wal-mart are bad for competition because they are so low other companies can't compete with the prices and stay in business at the same time.
Chris Templin
I don't think that the cut in generic drug prices would necessarily increase the total revenue, because Wal Mart would be pulling in such a small profit. I do think that the low prices would pull more customers into the store, which could lead to an increase in the purchase of other items. Say you were walking through Wal Mart on your way to the drug aile and you saw a frisbee on the shelf for 3 dollars, then you may be tempted to buy it. I think Wal Mart works like a gas station. They just want to get as many people through their store as possible, because once people come in they will become interested in the seemingly unlimited products sold by Wal Mart.
Chris Getz
Since the price of genaric drugs is going down the demand for brand name drugs will go down, because they are compliments. Since the demand for genaric drugs is elastic the total revenue would increase if the price went down... Since more people will buy the genaric drugs from Walmart since they are cheaper so since walmart is buying in bulk they will make a profit. I think that the total revenue of other stores would decrease in the drug store department because how cheap walmart's genaric drugs are.
andi
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