The price of basics like food and prescription drugs in Oahu

These topics came up in discussion with friends.

The conventional concept in pricing is that a producer has production costs and adds a modest markup for profits (technically the producer physically attaches the MSRP to the product after factoring in market forces) and prices the goods. The producer is motivated to build in efficiency to reduce costs and try and ramp up volume (to maximize profits) and competitive pressure keeps the markup of the producer modest and the quality at a satisfactory level (some producers compete on low price at the expense of quality which is fine).

In software (where I have some experience) and pharma (where my niece works) where often there is not a great deal of competition, the model is the price is set according to what the market will bear. There are many other industries with that model in a capitalistic system (my friend argues that almost all of them are in this bucket. I do not have experience with them). The producer is still motivated to reduce costs and ramp up volume, and competitive pressure, where present, motivates increasing quality and keeps prices in check (the government must prosecute vigorously, attempts at price fixing and formation of monopolies by producers).

The problem with the Pharma industry is that they take it to a whole another level for non-generic drugs. Even the cost of insulin – an old technology - was sky high at one time for no real reason except exploitation by producers. One aspect is patent protection which knocks out the competitive pressure. The second aspect is the medicine may make the difference for a consumer between life and death, or bad and decent quality of life, so they bear the cost as they are captive customers. The third aspect is that insurance often foots the bill, so the cost is masked to the consumer (but they do see the sky-high insurance rates if not paid or subsidized by employer or government). The fourth aspect are the huge research costs to develop new drugs, only a few of which move on to production. The same non generic drug in Mexico would be far cheaper. Not sure what the answer is. You do not want to kill the innovation in the industry. Prescription drug prices in Hawaii is not really different than the mainland and you can use a mainland mail order pharmacy as I do. 

Besides drugs, everyone needs food. Why did the prices of basic foods not come down after the pandemic subsided and the supply chain distortions disappeared? One theory is that during the pandemic, lower wage workers (restaurant staff, grocery staff, food distribution network staff, etc.) realized the power they had as essential workers, and demanded higher wages thereby jacking up labor costs. Another theory is that these workers moved to higher paying jobs, increasing producers’ costs to retain or rehire some or hire new ones. But even if these were not true across the spectrum of industry, producers, even if inclined to cut prices, cannot easily cut wages when their other production costs go down. Or maybe the producers in this industry are moving to a “what the market will bear” model as the industry has consolidated into just a few big players? This is a puzzle that has not been given an adequate answer by economists, at least in public media. 

Food is expensive anyway in Hawaii due to its location in the middle of the pacific. Most foods must be shipped or flown here. There is not a lot of arable land, and except for a few things like mangoes, coffee, bananas, pineapple, guava, taro, some cattle, some chicken/eggs, some hydroponic farms for example owned by Larry Ellison, and some tropical fruits, there is not a lot of edible stuff farmed. Not much Hawaii residents can do about these extra costs. On average, cost of groceries in Hawaii is roughly 60% more than California. People in Hawaii often buy in Costco or Sam's club where prices are lower.  

My primary complaint with the US food industry is all the additives added to our food, often without our knowledge. The additives often are to increase shelf life or make it look more attractive – capitalistic motifs. Another issue is the prevalence of hydrogenated oils for preparation. I think it is a disgrace. People say, buy at the edges of the supermarket, and not the center aisles. The edges have less processed foods like vegetables and dairy while the center has many ultra processed foods. Be choosy about what restaurant or deli foods you also eat and reduce it if possible.

For those hurting, from which direction may relief come from? Capitalism works great when its presumed conditions are met. When it isn’t, that is when a democratic government is tempted to intervene (I often think rightly) so vast swaths of the people survive adequately. Afterall a democracy is a government “for the people” and not for some abstract theory. A theory is an imperfect model of true reality. In retirement, my viewpoint is a consumer centric viewpoint since I have zero intersection with the producer side.