As a result, content distribution also incurs virtually zero marginal costs. Drugs provide another example of an industry characterized by high fixed costs and low incremental costs. In its race to develop one of the first successful treatments for impotence, Pfizer invested more than a half billion dollars. Yet now that Viagra has been developed, it is quite inexpensive for Pfizer to stamp out thousands of additional pills. High-technology companies have many more considerations than other companies in setting prices.
Most companies determine prices based on their production costs.
They mark up those costs, taking into account consumer demand and industry competition. Indeed, in many industries there are even rules of thumb for marking up costs. Not so for high technology. Owners and investors spend millions of high-risk dollars funding these ventures. For any firm to secure such high-risk capital, it must set prices high enough to compensate investors for the risks they take on.