But that cost just gets passed on to the patients of course.
It really doesn't.
One of the great secrets of our economic system is that the input cost--the cost it takes to produce a good or service--actually has absolutely nothing to do with the output cost--the price we pay for it.
The price we pay is set by whatever the market will bear. Businesses generally set this price as high as they can get it without hitting a point of diminishing returns.
The input cost is set as low as the businesses can get it. Everything between the input cost and the output cost is profit.
If it is possible for a business to raise the price of a good or service without hurting the profit, they'll do so. They don't need to justify it by passing along some of the input costs; if the market will bear the higher price, then they'll already have raised the price, regardless of expenses. You never take money off the table unless you have to. If the market won't bear the higher price, then they swallow the input cost and make slightly lower profits. The input cost bounces around all the time anyway, based on everything from labor shortages in Pakistan to oil prices in Dubai.
That doesn't work in larger markets however, where there's actual competition.
There are very few markets where there is actual competition. Markets maximize profit through collaboration, not competition. If you look at the store shelves and see Eveready batteries at one price and store-brand parties at another, that might look like competition, but the batteries are probably made in the same plant by the same company. The two price points represent two niche markets--the market that believes that the name brand represents superior quality, and the market that shops on price. These two markets don't actually compete with one another.
Same is true for everything from cars to hammers. Different price points don't necessarily represent competition, and different companies often choose not to compete on price. Even in commodities, where competition is more likely to occur, the presence of things like futures and derivatives end up blurring the competition. (Different oil companies will buy one another's futures, and even top off from raw gasoline from one another's refineries if they hit production snags.)
I read recently on slashdot about how an author tried changing some of his online books from $7-10 ea to $0.99 ea and got something like several hundred times the sales, increasing his bottom line dramatically. And now he's fighting a losing battle with the publishers that still have electronic rights on the rest of his books, who refuse to drop the price on them despite reality being thrust in their face.
I've been following that with some interest, since I'm now selling eBooks myself.
There is a caveat: This works only for popular, well-established writers with strong followings and large fan bases. If you're a small, obscure, or niche writer, it might not be *possible* to get hundreds of times more sales, no matter how low your price goes, simply because you don't have a following that's hundreds of times larger.
So small or not-yet-established writers can't follow that model--meaning they can either price their works cheap and starve, or set their prices higher and be utterly unable to compete with already-established writers.
The book retailers know this. They know that they could lower the prices on the super-popular writer's books and sell more books...but they would do it at the expense of gutting sales, or profits, or both from their less well-known writers. And since the writer's royalties are based on a percentage of the book's retail sale price, that means that less well-known writers are going to get screwed either way--they can take a larger royalty from smaller sales, or a smaller royalty from larger sales, but either way they lose money. The idea of drastically slashing book prices benefits popular, established mainstream writers at the expense of every writer who doesn't have a huge following.
(One of my sweeties is an editor for a large mainstream book publishing company; she and I have talked about this very topic in detail.)
