International price discrimination: The pharmaceutical industry

It is generally asserted that price discrimination is a common feature of the international pharmaceutical market, resulting in unnecessarily high medical costs to developing countries, since it is pharmaceuticals that are the largest component of their health care expenditures. However, little comprehensive empirical research has been carried out to test this hypothesis. This article compares the prices of identical packages of pharmaceutical products for 32 countries for the year 1975 and examines which factors contribute to thehuge price differences. A strong positive relationship between price level and per capita GDP is found, a 10% increase in per capita income being associated with on average 8% higher drug prices. The implementation of direct price control measures by the government results on average in a 20% price reduction, while government policies such as bulk purchasing through a centralized government agency, promotion of the use of generics and, to a lesser, extent excluding patent protection seem to be sucessful in lowering the general price level of pharmaceuticals. These results suggest that the pharmaceutical industry charges what the market “will bear”.