Differential pricing

There is a strange misconception around that differential pricing of pharmaceuticals (in which rich countries pay more than poor countries) is a form of subsidy by the rich of the poor. In fact, the opposite is true. If the people in poor countries pay something above the marginal cost – even if only slightly – then they are contributing towards the R&D costs. If you have a single price and so exclude the poor – so that they cannot buy the medicines at all – then they use nothing and contribute nothing. So differential pricing allows the burden of paying for the R&D to be spread more widely, and so the poor, to some (possibly small) extent, contribute to the costs of medicines used by the rich. Which means we should not think of differential pricing as a form of subsidy by the rich to the poor.

9 thoughts on “Differential pricing”

  1. You might have a point in alternative reality where Germany, France, Canada, etc, etc are poor countries. In that alternative reality only USA has money to support pharma research and others help a tiny bit by paying a tiny bit above cost of production and distribution.

    In my reality US pays bulk of pharma research costs while bunch of countries, some of whom have higher standard of living than US, riding on our back.

    Besides, who said that in a free market prices in poor countries will settle where they are now, negotiated under goverment duress?
    Pharma companies are perfectly able to set prices in poor countries to optimize their profit.

    Pharma market policy is a welfare for the whole world curtesy of US elites and paid by Joe Six Pack.

  2. Mik

    I try to be reality based here. On which measure do any of the countries you mention have a higher standard of living than the US?

    In free markets, producers often price along the demand curve if they can, charging those with a higher willingness to pay more than those who can afford to pay less. (Think of air travel, for example.) The fact that the pharmaceutical industry does this is not evidence of duress.

    And my original point stands. Differential pricing means that poorer countries make some contribution to R&D costs, which they would not do if they were priced out of the market by a higher, uniform price.

  3. Owen-
    Thanks for the trackback on this piece. Your point about contribution to R&D is correct, but incomplete. The important point in cost recovery is average contribution, spread across units sold. Price discrimination doesn’t define away the fact that cross-subdsidies exist, even though subsidized consumers contribute a small amount to fixed costs, I have a longer response to your points on my site today, which coincidentally uses the airline industry as an example:
    http://www.illusionfree.com/weblog/index.php/no_illusions/niperm/20050404_more_on_pharma_subsidies/

  4. Owen.
    I finally posted my response to your detailed points you posted earlier this week. Apologies in advance for directing the item specifically to you, but it started as a comment response, and just got to be too long for the comments section.

    Also, congratulations on the new report. I thought it important enough to give it a separate post, just to put the word out. Haven’t read the whole thing yet, but will get to it in the next few days. It looks like really first class work.

  5. Pingback: Vaccines for Development

  6. They may pay a little above the marginal cost of production of existing drugs – but the tab for developing new ones is way more expensive – and they are subsidised in that!

  7. Sean :- I think you need to read the post more carefully, and take a look at the longer posting by Dave Sheridan. The point is that it is not a subsidy if differential pricing means they are paying something towards the R&D costs if they otherwise would be priced out of the market altogether and so make no contribution at all.

  8. Mik interesting proposition, just not in line with the facts.

    Take a reality check.

    I’m amazed at the ignorance of Americans about Pharma (left or right wing, they still think they are subsidising foreign drug consumption). Big Pharma keeps you in a pretend universe by spending $500m on lobbying in the US during the last 5 years.

    The reality is that you are gouged by these corporations into over-paying. You do realise that most new molecules are discovered in Europe? That U.S. Pharma concentrates on developing expensive lifestyle drugs?

    http://www.global-growth.org/pharmopoly.htm

    http://www.pharmopoly.org

  9. Pingback: Owen abroad » Medicines, research and the developing world

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