Cost-based pricing
FlashcardsQuick reviseKey facts. One by one.Start →Also called: Cost-plus pricing · Topic: Markets, Equilibrium and Government Intervention · NCERT: Beyond NCERT
Meaning
Cost-based pricing (also called cost-plus pricing) sets a price by working out what it actually costs to make a product and then adding a fixed margin on top. The margin is the extra amount allowed over cost.
Price = Cost of production + Allowed margin
In drug price control, the regulator studies the cost of raw materials, manufacturing and packing, and then allows a set mark-up. Indian drug price orders used this method in the past. DPCO 2013 (the Drugs (Prices Control) Order, 2013) replaced it with market-based ceiling prices, which are worked out from the prices brands already charge in the market. Cost-based pricing matters because it is the one method that can bring down a high price set by the manufacturer itself, since the price is tied to real cost. It also has drawbacks. It needs detailed cost data from companies, and it can weaken the incentive to cut costs or spend on research.
Example
Say a cancer drug costs a company ₹1,000 a vial to make. Under cost-based pricing, the regulator might fix the price at ₹1,000 plus an allowed margin, no matter what the company was charging before. Even if the old price was ₹10,000, the new price is set by the ₹1,000 cost.
Don't confuse with
- Market-based ceiling price: the cap is set from the prices brands already charge in the market, not from what the drug costs to make. This is the main method under DPCO 2013.
- Trade margin cap: this limits only the gap between the price the manufacturer sells at and the MRP (for example, 30% for 137 non-scheduled anti-cancer drugs in 2026). The manufacturer's own price is left untouched.