Through very effective marketing campaigns, Mylan has convinced consumers that i

Question

Through very effective marketing campaigns, Mylan has convinced consumers that its EpiPen is superior to other competing products. As a result, the own-price elasticity of demand for EpiPen has changed to -1.11 from -2.0. If you are the CEO of Mylan and you are charged to maximize your company’s profits, how much will you set your EpiPen’s price over its marginal cost? With your marginal cost remaining unchanged, estimate your percentage price hike as you adjust your mark-up factor to reflect the new demand elasticity. Discuss the ethics of your pricing strategy. Who is helped? Who is hurt? Overall, would the price hike help or hurt more?

Explanation / Answer

Markup on price = -1/Ed . This implies

(P -MC )/ P = 1/1.1,

[(P -MC )/P] = 0.91*100

Percentage in price hike = 91%

Given the demand is inelastic the pricing strategy involves increasing the price to increase the revenue.The price increase will hurt the consumer as they have to pay more.

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