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Darwin's Medicine blog

Professor Brian D Smith is an authority on the pharmaceutical industry and works at SDA Bocconi University and Hertfordshire Business School.

Tragedy of the commons

Evolution suggests we need to be altruistic to our rivals

Darwin's Medicine

Industry leaders and executives typically worry most about the success of their own firm, their attitude to the problems of other companies being closer to schadenfreude than to sympathy. Recently, for example, I witnessed some cynical pleasure being taken when Turing Pharmaceuticals' aggressive pricing tactics got it into trouble. But evolutionary science would tell us that the whole industry should be worried about this episode and similar trends in pricing policy. As usual with this column, let me explain the science and then come back to the practical implications.

Evolution is a selection process in which the environment picks the winners. For decades, we've considered that the unit of selection is, in Richard Dawkin's words, the selfish gene. But more recently, evolutionary scientists have suggested that gene-level selection alone is not enough to explain the evolution of, for example, the behaviour of ants and other social animals. The father of sociobiology, Edward Wilson, and his colleagues now propose that natural selection works at both gene level and at the level of the group. For example, the herd, the ant colony, the tribe. Hence a trait or behaviour that may favour an individual may disfavour the group and vice versa. Evolutionary psychologists suggest that this multilevel selection is responsible for the development of altruism, because altruistic behaviour favours the group and hence the individual. Wilson points to the dynamic balance between group and individual selection as a shaper of human nature. In great societal achievements, we see a good balance. When the balance goes awry, we get a 'tragedy of the commons', such as overfishing of the seas or, more prosaically, email spam.

The collective use of aggressive pricing risks harming the industry

How does this relate to the life sciences sector and to pricing policy in particular? Well in the evolution of industries the analogue of genes are organisational routines, sub-processes that express themselves as capabilities. Routines are selected for when they help a firm thrive in the environment and vice versa. Now supposing the routines of a life science company that determine pricing policy mutate and lead to much more aggressive pricing. The greater profits enable the firm to thrive and the 'gene' is selected for. Like a cow suddenly being able to eat a lot more grass or a wolf being able to catch more prey. But cows, wolves and life science companies depend for their survival on others of their species. So, although the gene may favour the individual cow, wolf or company, it may disfavour the survival of the herd, pack or industry. We see exactly this happening with the industry's pricing policy. Although helping individual firms to be more profitable, the collective use of aggressive pricing, which we can see in both generics and innovative products, risks harming the industry. If Hilary Clinton makes good on her current rhetoric and imposes price controls, it will be an environmental reaction against industry pricing policy and it will harm the whole sector. The analogy to the grass being overgrazed or the prey hunted to extinction is very clear.

The practical implications of this are important to the industry and society. When setting pricing policies, it is the default position of most firms to make as much profit as possible, just as a cow will eat as much grass as it can and a wolf hunt as much prey. But if many firms do that, the environment will respond through price controls or changing the rules on patents. And just as environmental response is often delayed but sudden - the collapse of fish stocks for example - then payer response is likely to be deferred until a politically sensitive episode - children's cancer drugs, for example - triggers a disproportionate response. And given this is politics and press coverage we're discussing, we would be naïve to expect a measured, intelligent payer response.

How might individual life science companies change their behaviour to avoid such a tragedy of the commons? After all, they have a fiduciary duty to optimise profits. Well, there are four obvious actions. Firstly, set prices according to value delivered rather than what competition allows. Secondly, demonstrate and communicate that value in a transparent manner rather than make vague arguments that we need to reinvest profits. Thirdly, pay special attention to the pricing of politically sensitive products. Finally, altruistically encourage and teach all companies in the industry to behave this way. In my research, I can see a few enlightened firms moving towards this long-term approach. But the danger is that we only need a few firms to visibly 'gouge the customer' to trigger a media-led, politically motivated, disproportionate response by payers. That would truly be a tragedy of the commons, for patients, payers and everyone else.

Brian welcomes comments and questions on this column at 

10th November 2015

From: Sales



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