TERM PAPER (EC 501)
TOPIC- PRICE DISCRIMINATION BY
GLOBAL PHARMACEUTICAL
INDUSTRY
This Photo by Unknown Author is licensed under CC BY-SA
ROLL NO. NAME TOPICS
23PGDM-BHU001 AAKANSHA Demand and Supply
MISHRA Factors
23PGDM-BHU013 ASHIS KUMAR Analysis from a Market
MANDAL Structure Perspective
23PGDM-BHU023 HEMANT Cost of Production,
KAUSHAL Marketing and Distribution
23PGDM-BHU033 PRABAL Price and Output in Pan
PRATAP SINGH Indian/Global Market,
Future directions of the
firms and the industry.
23PGDM-BHU045 SANDEEP GUPTA Profitability
23PGDM-BHU055 SUBARNA Entry/Exit Threats,
GHATAK Overall summing up
UNDER THE GUIDANCE OF PROF. RAMAKRUSHNA PANIGRAHI
INTRODUCTION:
The pharmaceutical industry has faced criticism for its high profits, lack of price
competition, and concentration in production, along with excessive spending on marketing.
This has led to perceptions of monopolistic behavior, where they charge high prices without
regard for market conditions. This situation is particularly detrimental to developing
countries, which spend a significant portion of their GDP on pharmaceuticals, potentially
hindering their economic opportunities.
Efforts to reduce medicine costs in developing nations have been proposed, but the evidence
of deliberate price discrimination by the pharmaceutical industry is unclear due to limited
research. This paper aims to investigate whether the industry engages in international price
discrimination. It will analyze pharmaceutical prices in 32 countries, explore the industry's
structure and pricing behavior, and assess how prices vary internationally.
STRUCTURE OF GLOBAL PHARMACEUTICAL INDUSTRY:
In addition, the drug market is highly volatile in terms of price elasticity, as the market is not
transparent and the nature of the pharmaceutical product (which should be considered a
commodity) is often purchased out of necessity. Furthermore, in most developed countries,
the decision to purchase is made by a doctor who has little incentive to economize as he does
not need to pay for the products he orders and rarely has knowledge of the cost of drugs,
while consumers are not very price conscious as drugs costs are usually paid by a third party.
The structure of the pharmaceutical industry, as described by several authors, has led to
significant price discrimination within and among countries, which is the subject of this
article. For example, Dr. Muller states, “What’s important is not just the large differences
between the quotes of different companies, but the fact that these same companies asked
prices that varied by 400 percent from country to country.”
COMPARISON OF PRICES IN DIFFERENT COUNTRIES:
The pharmaceutical industry is secretive about their real transaction prices, so there's not
much information about prices for pharmaceutical products, especially when it comes to
developing countries. Not only is there limited price data, but there's also a problem with how
easy it is to compare prices between countries. It's common knowledge that the relative prices
of goods and services in low-income countries tend to be lower. Plus, when you compare
prices of different countries at different exchange rates, it's usually not a good idea since the
exchange rates don't reflect the relative purchasing power of the currencies. The official
exchange rate is often not a good indicator of the scarcity of a currency when it's not freely
convertible against other currencies, which is why in many developing countries, the
currency is overvalued.
GLOBAL PRICE DISCRIMINATION:
The pricing of pharmaceuticals in different countries, particularly in developing nations like
Ghana, presents a complex and challenging issue with significant implications for healthcare
accessibility and affordability. In this elaboration, we will delve into the nuances of
pharmaceutical pricing, the role of exchange rates, the concept of International Price Parity
(ICP), and the methodology employed by researchers like Kravis to assess international drug
prices. We will also explore the reliability of such data and its implications for global
healthcare disparities.
Pharmaceutical Pricing and Exchange Rates:
Pharmaceutical pricing is a critical aspect of healthcare policy, particularly in developing
countries where access to affordable medicines is a pressing concern. A significant portion of
pharmaceuticals in countries like Ghana is imported, which means that exchange rates play a
crucial role in determining drug prices. If these imported drugs were priced solely based on
exchange rates that accurately reflected production costs at home and abroad, the cost of
drugs in Ghana would likely be substantially higher than what is reported by the Ministry of
Health. This discrepancy arises because currency values have experienced significant
fluctuations since the early 1970s, and converting drug prices at current exchange rates could
result in substantial price swings.
International Price Parity (ICP) as a Comparative Tool:
To address the challenges associated with currency fluctuations and international drug price
comparisons, researchers have developed alternative methods, one of which is the concept of
International Price Parity (ICP). Essentially, ICP serves as an international price index that
aims to provide a more accurate and equitable way to compare drug prices and incomes
across different countries. It is based on the idea of purchasing power parity, which considers
the relative price levels of goods and services in various countries to determine the real value
of a currency.
Kravis' Approach to Price Indices:
One of the notable efforts in utilizing ICP for pharmaceutical price comparisons is
exemplified by the work of Kravis. He recognized that the process of collecting and
organizing price data is resource-intensive and crucial for meaningful comparisons. Kravis's
methodology involved each country selecting specific drugs from a larger list, which was
more comprehensive than what they needed. This approach aimed to create a more
comprehensive price matrix, ensuring a more representative sample of pharmaceutical prices
from a diverse set of countries. Kravis used a weighted version of Least Squares to account
for the number of countries with missing price data, enhancing the accuracy of his
comparisons.
Critiques of Kravis' Study:
While Kravis's work has contributed significantly to our understanding of international
pharmaceutical pricing, it is not without its critics. Some have questioned the methodology,
data collection processes, and representativeness of the drug samples chosen by each country.
However, as Theil points out, the data produced by Kravis and his team represents one of the
most comprehensive efforts in this field. It may not be perfect, but it offers valuable insights
into the relative pricing of pharmaceuticals across different nations.
Reliability of Pharmaceutical Price Data:
Assessing the reliability of pharmaceutical price data is crucial. In comparison to other
services like healthcare or education, pharmaceuticals often have well-defined characteristics
that allow for accurate identification, such as chemical formulas or patent descriptions. This
lends credibility to the reliability of price data for pharmaceutical products. However, it is
essential to recognize that price indices generated through methodologies like ICP should be
regarded as indicators rather than precise measures of price differences between countries.
They provide valuable insights but may not capture all the nuances of the pharmaceutical
pricing landscape.
Implications for Global Healthcare Disparities:
The accuracy of pharmaceutical price data and the methods used to assess it have significant
implications for global healthcare disparities. Access to affordable medicines is a
fundamental component of healthcare equity. Inaccurate or manipulated pricing can lead to
unequal access to life-saving drugs, disproportionately affecting vulnerable populations in
developing countries like Ghana. Therefore, efforts to improve the reliability of
pharmaceutical price data and develop equitable pricing mechanisms are critical to
addressing global healthcare disparities.
In conclusion, pharmaceutical pricing is a complex issue, particularly in developing
countries, and exchange rates can significantly impact drug costs. The concept of
International Price Parity (ICP) and methodologies like Kravis's offer valuable tools for
comparing drug prices across nations, although they are not without limitations. The
reliability of pharmaceutical price data is crucial for ensuring equitable access to healthcare
worldwide, and addressing global healthcare disparities requires continued efforts to refine
and improve pricing mechanisms.
FACTORS CONSIDERED FOR CROSS COUNTRY STUDY:
The analysis in the upcoming section aims to delve into the differences in pharmaceutical
prices within the market. These differences will be assessed through the lens of price indexes
and explained using various demand and institutional variables. The Ordinary Least Squares
(OLS) method will be employed to estimate the relationship between price levels and these
explanations. While demand and government policies are known influencers of pricing
behavior in the pharmaceutical industry, the supply side will not be explored due to the
complexity and granularity of the data, as monopolistic power typically operates at the sub-
market level.
One key factor in understanding pharmaceutical pricing is the relationship between the price
of drugs and a country's purchasing power, captured by GDPIN, based on Kravis' PPP
(Purchasing Power Parity). This relationship is founded on the premise that when individuals
have higher incomes, they are less inclined to seek the cheapest available drugs, rendering
demand more price-sensitive. In essence, this suggests that pharmaceutical pricing is
influenced by the relative wealth of a country's population.
Another significant aspect is the total volume of drugs consumed within a country, reflecting
the size of the market. This becomes particularly relevant when economies of scale in
marketing and research and development (R&D) can lead to cost savings. Paradoxically, a
negative correlation is observed between the price level of pharmaceuticals and the size of the
market, implying that larger markets may not necessarily result in lower drug prices.
Market attractiveness encompasses not only size but also demand. The population of a
country serves as a gauge of the potential customer base and the likelihood of product
purchases. Consequently, in an attractive market with more potential customers, increased
competition may lead to higher prices, reflecting a positive relationship between competition
and price levels.
The degree of market development is another crucial factor to consider. Typically, consumers
prioritize essential needs like pharmaceuticals before indulging in luxuries such as
tranquilizers. In well-developed markets, competition intensifies as more companies enter,
leading to greater diversity in consumer spending patterns. Therefore, there is often a
negative correlation between the price level and the average consumption level in well-
developed markets, highlighting the competitive dynamics at play.
Patents emerge as a significant instrument for gaining control over the market. Companies
holding patents for pharmaceuticals benefit from protection against both domestic and
foreign competition, granting them the ability to charge higher prices. Hence, there appears to
be a strong connection between the strength of patent protection and the price level of
pharmaceuticals, with stronger patent protection allowing for greater pricing power.
Furthermore, while patents protect a product for a specific duration, building brand loyalty
over the patent's life can extend its protection. For instance, Statman's study in 1981, focusing
on the United States, found that generic and brand name competitors struggled to gain
significant market share from the original brand. Therefore, a strategic shift towards
promoting generic products over trademarked ones could reduce entry barriers and enhance
competition in the pharmaceutical market.
Government import policies have a substantial impact on the cost of pharmaceutical goods.
When governments implement policies that encourage price competition and enable the
procurement of high-quality supplies at lower prices, a negative relationship is observed
between the price level of pharmaceuticals and these government policies. This underscores
the importance of government regulations and import policies in shaping drug prices within a
market.
In summary, the analysis in this section explores the multifaceted factors influencing
pharmaceutical prices. These include the relationship between price and purchasing power,
market size, demand, market development, patent protection, and government import
policies. These factors collectively contribute to the intricate pricing dynamics observed in
the pharmaceutical industry, shedding light on the various forces at play within this complex
market.Basically, the drug industry is expected to see a decrease in prices due to government
policies that set maximum prices for either drugs or raw materials. This means that there's a
negative correlation between price level.
OBSERVATIONS IN CROSS COUNTRY STUDY:
The relationship between drug prices and the purchasing power of a country's population is
indeed significant. When the purchasing power of a population increases by 10%, the average
drug price tends to rise by 8%. This observation indicates that the pharmaceutical industry
derives substantial revenue from the global consumer surplus, implying that the world market
for drugs exhibits characteristics of monopolistic behavior.
Economies of scale in marketing and research, while often considered as factors that should
promote competition, may not have the expected impact on drug prices. The research
suggests that the total volume of drugs consumed in a country, which represents the size of
the market, doesn't exert a substantial influence on drug pricing. Despite a 10% increase in
drug consumption per person (as represented by the CV/N coefficient), the resulting 3% drop
in drug prices indicates that competition within the pharmaceutical industry might not be the
primary driver of pricing dynamics. Instead, other factors such as innovation and product
differentiation appear to play a more substantial role in shaping drug pricing.
In summary, the connection between purchasing power and drug prices supports the notion
that the pharmaceutical industry operates with significant market power, potentially
monopolistic in nature. The limited impact of market size on drug prices suggests that factors
beyond competition, such as innovation and product differentiation, have a more pronounced
effect on pricing behavior in the pharmaceutical market.
Direct price control measures, on the other hand, are shown to be highly effective in reducing
drug prices, often resulting in drops of more than 20%. In contrast, the impact of the other
two policies, Intellectual Property Compulsory Licensing (IPC) and Parallel Imports (PP), on
drug prices is also in a downward direction, but their effects are less pronounced due to the
relatively smaller estimated co-occurrences. This may be attributed to the simplicity of using
dummy variables to measure government policies, which tend to have an "all or nothing"
approach, making it challenging to capture the nuances of various policies accurately.
While patents are acknowledged as a means for large companies to strengthen their market
power, the analysis suggests that they are not the sole factor influencing drug prices. Patent
protection affects not only the pricing of drugs but also the inclusion or exclusion of
pharmaceutical production from patent protection, the duration of protection, and the ease of
circumventing patent laws. Interestingly, the research indicates that the impact of patent
protection on drug prices is relatively small. Furthermore, Chudnovsky argues that, although
more research is required, it appears that the absence of or weak patent protection has not
significantly altered the behavior of transnational corporations (TNCs) operating in
developing countries.
In summary, the analysis highlights that the size of the pharmaceutical market and
competition may have a limited impact on drug pricing, with other factors like innovation,
product differentiation, and government policies playing more substantial roles in
determining drug prices. While patents can strengthen the market power of large
pharmaceutical companies, their influence on drug prices is relatively small, and the absence
of strong patent protection does not seem to have significantly altered the behavior of TNCs
in developing countries, according to Chudnovsky's argument.Lowering drug prices in the
pharmaceutical industry can be achieved through policy measures such as eliminating patents
and promoting the use of generic drugs or reducing trademark protections. While there's no
concrete data combining patents and trademarks, Patel (1983) suggests that a combination of
five policies could potentially save up to 60% in total drug spending. Sri Lanka's example
demonstrates the effectiveness of well-designed drug policies. In the 1970s, the country
reformed its pharmaceutical production, import, and distribution systems, resulting in a 40%
overall savings in just one year. Some multinational corporations even reduced their drug
prices by 50-70% in response to these changes.
The pricing of drugs in developing countries is heavily influenced by factors like the
population's purchasing power and the success of drug policies. This leads to international
price discrimination in the pharmaceutical industry. Despite lower nominal prices in
developing countries, the actual costs can be substantially higher. For instance, in Malawi, the
real cost of drugs exceeds 12 times that of the United States, and in Sri Lanka, it's
approximately 60 times higher. Given that 40% of total healthcare costs in developing nations
are related to pharmaceuticals, this can strain resources needed for other critical healthcare
services.
Establishing fair drug prices that reflect production costs is crucial for developing countries.
The United Nations Industrial Development Organization (UNIDO) suggests that these
countries should aim for the lowest prices for the required drugs while still supporting
production and research. This objective is challenging in a free market where numerous drugs
with varying prices for the same products exist. Consequently, individuals often pay
substantial amounts for brand-name or patent-protected drugs, resulting in high profits that
may not align with public health goals. Furthermore, inadequate information can hinder
prescribers from making informed decisions.
Research from the International Comparison Project indicates that drug prices are determined
by a country's purchasing power and the effectiveness of its drug policies. For instance, a
10% increase in a country's GDP is associated with an 8% higher average drug price, but
direct price control measures by the government can lead to a 20% reduction in average
prices. This price discrimination disproportionately affects poorer countries that have limited
control over their drug prices.
Using aggregated data to explain drug prices has some uncertainty due to the pharmaceutical
market's complexity, so the study's results should be interpreted with caution. Nevertheless, it
underscores the importance of sensible drug policies, especially given the rapid growth in
pharmaceutical spending by developing countries from 1981 to 2000, increasing from $19
billion to over $71 billion. This substantial expenditure suggests that drug prices will
continue to exert pressure on the development of other critical healthcare services in the
future.
SUMMARY:
The pharmaceutical industry has been widely criticized for its excessive profits, lack of price
competition, and high concentration in production, as well as its excessive expenditure on
marketing and promotion and price discrepancies for identical products.
But the proof that the pharma industry is trying to keep prices different for different countries
isn`t very clear.
Most of the research has been done on a few drugs and a few countries, so it's hard to know
what's causing the differences in prices.
We'll do this by looking at the prices of pharmaceutical products across different countries.
We'll look at the relationship between the structure and pricing behavior of the industry, then
compare the prices of pharmaceuticals in 32 countries.
STRUCTURE OF GLOBAL PHARMACEUTICAL INDUSTRY: In addition, the drug
market is highly volatile in terms of price elasticity, as the market is not transparent and the
nature of the pharmaceutical product (which should be considered a commodity) is often
purchased out of necessity.
Furthermore, in most developed countries, the decision to purchase is made by a doctor who
has little incentive to economize as he does not need to pay for the products he orders and
rarely has knowledge of the cost of drugs, while consumers are not very price conscious as
drugs costs are usually paid by a third party.
The structure of the pharmaceutical industry, as described by several authors, has led to
significant price discrimination within and among countries, which is the subject of this
article.
Comparing pharmaceutical prices across different countries poses several challenges. The
pharmaceutical industry keeps transaction prices secretive, particularly for products in
developing countries. Limited availability of price data is compounded by difficulties in
making accurate cross-country price comparisons. Converting prices using exchange rates is
problematic because it doesn't reflect the relative purchasing power of currencies and can
lead to misleading results. Additionally, currency fluctuations since the 1970s could result in
significant price level swings if converted at current exchange rates.
To address these issues, researchers have employed an alternative approach, using the
concept of purchasing power parity (PPP) for each country to create price indices, with the
United States as the reference point. However, creating a comprehensive and representative
list of pharmaceutical products for various countries with diverse income levels and cultures
can be challenging. Kravis proposed a method that involved countries selecting specific drugs
from a larger list, and this approach considered the number of countries with missing price
data, offering a weighted version of Least Squares.
While the price data for pharmaceutical products is generally considered reliable, the
resulting price indices should be viewed as indicators rather than precise measures of price
differences between countries.
In the subsequent section, the study will delve into the variations in pharmaceutical prices as
reflected in the price indexes. It will also explore factors such as demand and government
policies, which are known to influence pricing behavior in the pharmaceutical industry.
However, the study will not examine the supply side extensively, as the data on monopolistic
power is typically used at the sub-market level and is too voluminous to include
comprehensively.
