In 1996, the drug Prilosec became the best-selling anti-ulcer drug in the world. (The drug was the most effective available, and its sales outdistanced those of its nearest competitor.) Although Prilosec’s marginal cost (production and packaging) was only about $.60 per daily dose, the drug’s manufacturer initially set the price at $3.00 per dose—a 400 percent markup relative to MC!
Research on demand for leading prescription drugs gives estimates of price elasticities in the range -1.4 to -1.2. Does setting a price of $3.00 (or more) make economic sense? Explain.