[PapaBear3625]

It seems that the FDA has a hoop a prospective generic drug maker has to jump through, namely the generic drug approval process. This makes the startup cost to produce a generic drug high enough to be non-trivial. This means that once one supplier has been approved, it scares off other potential suppliers, as they don't want to go through the expense only to find that the revenue (because of price competition) is inadequate to recover expenses.

[Brilliant]

I can understand why that process would restrain competition and drive the price up. What I can’t understand is why those generic companies which are in business would sell the product at such a low price that there is a shortage. Why not jack up the price and eliminate the shortage? The only explanation I have is that their ability to jack up the price must somehow be restricted by non-competitive factors. My suspicion is that either the insurance companies, the government, or both have basically told them, “This is what we’re going to pay for it, and nothing more. If you can’t sell it for that, then so be it.”

In other words, it’s not the supply side that is the problem, but the demand side.