Pharmaceuticals as a market for "lemons": Theory and practice

Drawing on economic theory and institutional analysis, this paper reframes Akerlof's theory of how a market for lemons operates and argues that each of the many markets for lemons must be studied empirically to document how different stakeholders cope with the problems of information asymmetry, secrecy, and power. Such markets are a new field for sociological analysis. To illustrate, the paper characterizes pharmaceuticals as a multi-tier market of information asymmetry in which actors in each tier have substantial control over how much they disclose about hidden risks of harm. Such a market rewards the production and sale of "lemons." Current incentives and institutional practices reward developing a large number of barely therapeutically innovative drugs and ignoring their often hidden or understated harmful side effects. They reward designing and executing substandard, biased trials that mislead the FDA and regulators abroad to approve new drugs without clear evidence of their degree of harm. Approved drugs are likely to be "lemons" but promoted as "safe and effective." The result is substantial hospitalizations and deaths from adverse drug reactions. A "risk proliferation syndrome" of institutional practices maximizes sales, profits, and exposure to toxic side effects. An "inverse benefit law" of marketing operates as companies try to maximize sales. The probability of benefits decreases but the chances of lemons adverse events do not. The details presented here deepen understanding of how markets for lemons thrive on information asymmetry, secrecy, and power. Lessons can be applied to other markets.