What Drug Dealers Can Learn From Walgreens, with Stephen J. Dubner

Author Stephen J. Dubner analyzes the economics of drug dealing in the most Freakonomics way possible, comparing the capitalist tendencies of Walgreens with your friendly neighborhood gang of crack dealers.

Stephen J. Dubner: In our first book Freakonomics we wrote about the economics of a crack-selling gang in Chicago. And it was really fun and interesting because we have these assumptions that if you sell drugs, you become a millionaire. And it turns out that the average criminal, drug-selling gang is set up kind of like a franchise, kind of like a McDonald’s really. And that if you own 10 McDonald’s, you do pretty well; you make good money. And if you’re a manager at one you do okay. But if you’re an employee at one, you know, you make very little money. And it turns out that’s the way a drug gang works. That the vast majority of the profits are concentrated at the top. And so we made the argument that, you know, the average crack dealer isn’t, you know, they’re not very well off and the average crack dealer lives at home with mom and often has a second job at a place like McDonald’s. Well if crack dealers could take lessons from their legitimate drug-selling counterparts, they could do a lot better. So here’s what I mean by that.

Generic drugs, we think — most people seem to think because they’re generic, they’re priced the same. That seems to be kind of the way we think it should work. But as it turns out if you look at the pricing data on generic drugs across different companies, retailers, that sell it, there are instances where I could go to a Walgreens and buy a bottle of, you know, pills, generic — let’s say a statin — and it would cost about $110. And the same, exact bottle of pills at a different place like a Sam’s Club or a Costco would cost literally about $10 or $15. So a markup of like 1,000 percent for the same product that is sold by two companies that look pretty similar and that are generic, moreover. So when you look at this data it’s just shocking. You think how can this possibly be? Not only how can they get away with it? I mean anybody can charge anything they want. Nobody has to buy it, but why would people buy it? And it turns out the reason is very simply that most people who get their, buy their prescriptions in a given place, especially a lot of older people who you get more drugs as you — you buy more drugs as you get older and you’re more on a kind of plan. They just kind of make the assumption that a generic pill is going to be priced the same from one to the next. But it turns out there’s massive, massive disparity in that.

So really, you know, Walgreens is way better at dealing drugs than drug dealers are if the goal is profit maximizing. And I think that even though the people who are just selling at the counter at Walgreens, they are I’m sure not making very much money. You know the shareholders of Walgreens appreciate that a firm like Walgreens is really good at dealing drugs and profit maximizing. So from an economic perspective you have to applaud them. From a fairness perspective, you have to decry them. On the other hand that’s what capitalism is about. It’s about, you know, caveat emptor, you are free to shop around. And if someone can take advantage of what’s called information asymmetry, right, people on different sides of a transaction — I know a lot more about this price than you do — they can exploit it. That’s what’s good about the digital revolution is it makes information asymmetry much harder to maintain. So I don’t know if such an app exists, but a good one would be a very, very, very, very simple price comparison for generic drugs. And it would presumably, off the bat, save, you know, elderly Medicare patients billions of dollars within a month. Of course it would cut into the corporate profits of those shareholders, but that would work.

Author Stephen J. Dubner analyzes the economics of drug dealing in the most Freakonomics way possible, comparing the capitalist tendencies of Walgreens with your friendly neighborhood gang of crack dealers. He also explains how drug stores like Walgreens are able to get away with marking up their generic drugs as much as 1,000 percent, exploiting informational asymmetry to rip off those who don't know any better. Dubner's latest book, co-authored by Steven D. Levitt, is called When to Rob a Bank.

Live on Monday: Does the US need one billion people?

What would happen if you tripled the US population? Join Matthew Yglesias and Charles Duhigg at 1pm ET on Monday, September 28.

Ultracold gas exhibits bizarre quantum behavior

New experiments find weird quantum activity in supercold gas.

Credit: Pixabay
Surprising Science
  • Experiments on an ultracold gas show strange quantum behavior.
  • The observations point to applications in quantum computing.
  • The find may also advance chaos theory and explain the butterfly effect.
  • Keep reading Show less

    Learn innovation with 3-star Michelin chef Dominique Crenn

    Dominique Crenn, the only female chef in America with three Michelin stars, joins Big Think Live.

    Big Think LIVE

    Having been exposed to mavericks in the French culinary world at a young age, three-star Michelin chef Dominique Crenn made it her mission to cook in a way that is not only delicious and elegant, but also expressive, memorable, and true to her experience.

    Keep reading Show less

    3 cognitive biases perpetuating racism at work — and how to overcome them

    Researchers say that moral self-licensing occurs "because good deeds make people feel secure in their moral self-regard."

    Photo by Christina @ wocintechchat.com on Unsplash
    Personal Growth

    Books about race and anti-racism have dominated bestseller lists in the past few months, bringing to prominence authors including Ibram Kendi, Ijeoma Oluo, Reni Eddo-Lodge, and Robin DiAngelo.

    Keep reading Show less

    Should you grow a beard? Here's how women perceive bearded men

    Whether or not women think beards are sexy has to do with "moral disgust"

    Photo Credit: Frank Marino / Unsplash
    Sex & Relationships
    • A new study found that women perceive men with facial hair to be more attractive as well as physically and socially dominant.
    • Women tend to associate more masculine faces with physical strength, social assertiveness, and formidability.
    • Women who display higher levels of "moral disgust," or feelings of repugnance toward taboo behaviors, are more likely to prefer hairy faces.
    Keep reading Show less

    Only 35 percent of Americans know the symptoms of Alzheimer's disease

    Yet 80 percent of respondents want to reduce their risk of dementia.

    Photo: Lightspring / Shutterstock
    Mind & Brain
    • A new MDVIP/Ipsos survey found that only 35 percent of Americans know the symptoms of Alzheimer's disease.
    • Eighty percent of respondents said they want to reduce their risks.
    • An estimated 7.1 million Americans over the age of 65 will suffer from Alzheimer's by 2025.
    Keep reading Show less
    Quantcast