Abstract
This paper reviews the economic case for patents and the potential for differential pricing to increase affordability of on-patent drugs in developing countries while preserving incentives for innovation. Differential pricing, based on Ramsey pricing principles, is the second best efficient way of paying for the global joint costs of pharmaceutical R&D. Assuming demand elasticities are related to income, it would also be consistent with standard norms of equity.
To achieve appropriate and sustainable price differences will require either that higher-income countries forego trying to “import” low drug prices from low-income countries, through parallel trade and external referencing, or that such practices become less feasible. The most promising approach that would prevent both parallel trade and external referencing is for payers/purchasers on behalf of developing countries to negotiate contracts with companies that include confidential rebates. With confidential rebates, final transactions prices to purchasers can differ across markets while manufacturers sell to distributors at uniform prices, thus eliminating opportunities for parallel trade and external referencing.
The option of compulsory licensing of patented products to generic manufacturers may be important if they truly have lower production costs or originators charge prices above marginal cost, despite market separation. However, given the risks inherent in compulsory licensing, it seems best to first try the approach of strengthening market separation, to enable originator firms to maintain differential pricing. With assured market separation, originators may offer prices comparable to the prices that a local generic firm would charge, which eliminates the need for compulsory licensing.
Differential pricing could go a long way to improve LDC access to drugs that have a high income market. However, other subsidy mechanisms will be needed to promote R&D for drugs that have no high income market.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Averch, H. and L. Johnson. (1962). “Behavior of the Firm Under Regulatory Constraint.” American Economic Review 52, 1052–1069.
Baumol, W. J. and D. F. Bradford. (1970). “Optimal Departures From Marginal Cost Pricing.” American Economic Review 265–283.
Breutigam, R. R. (1984). “Socially Optimal Pricing with Rivalry and Economies of Scale.” Rand J. of Economics 127–134.
Commission on Intellectual Property Rights. (2002). Integrating Intellectual Property Rights and Development Policy. London: Commission on Intellectual Property Rights.
Danzon, P. M. (1997). “Price Discrimination for Pharmaceuticals: Welfare Effects in the US and the EU.” International Journal of the Economics of Business 4(3), 301–321.
Danzon, P. M., Y. R. Wang and L. Wang. (2003). “The Impact of Price Regulation on the Launch Delay of New Drugs: Evidence from Twenty Five Countries in the 1990s.” Working Paper, The Wharton School.
DiMasi, J. A., R. W. Hansen, H. G. Grabowski and L. Lasagna. (1991). “The Cost of Innovation in the Pharmaceutical Industry.” Journal of Health Economics (10), 107–142.
DiMasi, J. A., R. W. Hansen and H. G. Grabowski. (2003). “The Price of Innovation: New Estimates of Drug Development Costs.” Journal of Health Economics 22, 151–185.
Dumoulin, J. (2001). “Global Pricing Strategies for Innovative Essential Drugs.” Int J Biotechnology 3(3/4), 338–349.
European Commission. (2002). Proposal for a Council Regulation to Avoid Trade Diversion into the European Union of Certain Key Medicines. 30 October 2002.
European Commission. (2003). “Access to Medicines.” Press release IP/03/748, Brussels, 26 May 2003. http://europa.eu.int/comm/trade/csc/med.htm.
Fink, C. (2001). “Patent Protection, Transnational Corporations, and Market Structure: A Simulation Study of the Indian Pharmaceutical Industry.” Journal of Industry, Competition and Trade 1(1), 101–121.
Grabowski, H. G. and J. M. Vernon. (1990). “A New Look at the Returns and Risks to Pharmaceutical R & D.” Management Science 36(7), 804–821.
Ganslandt, M., K. Maskus and E. Wong. (2001). “Developing and Distributing Essential Medicines to Poor Countries: The DEFEND Proposal.” Annex of Maskus, K. E., 2001. Parallel Imports in Pharmaceuticals: Implications for Competition and Prices in Developing Countries. Final Report to World Intellectual Property Organization.
Global Fund for AIDS, Tuberculosis and Malaria. (2002). “Report of the Third Board Meeting, Item 10 Report of the Task Force on Procurement and Supply Management.” www.globalfundatm.org/ publicdoc/Third%20Board%20Meeting.pdf.
Hausman, J. A. and J. K. MacKie-Mason. (1988). “Price Discrimination and Patent Policy.” RAND Journal of Economics 19(2), 253–265.
Kremer, M. (1996). “AMechanism for Encouraging Innovation.” Development Discussion Paper No. 533. Harvard University.
Laffont, J.-J. and J. Tirole. (1993). A Theory of Incentives in Procurement and Regulation. Cambridge: MIT Press.
Lanjouw, J. O. (1998). “The Introduction of Pharmaceutical Product Patents in India: Heartless Exploitation of the Poor and Suffering?” NBER Working Paper Series No 6366.
Lanjouw, J. O. (2002). “A Patent Policy for Global Diseases: US and International Legal Issues.” Harvard Journal of Law and Technology (Fall, 2002).
Malueg, D. A. and M. Schwartz. (1994). “Parallel Imports, Demand Dispersion, and International Price Discrimination.” Journal of International Economics 37, 167–195.
Manning, R. (1997). “Products Liability and Prescription Drug Prices in Canada and the United States.” J. of Law and Economics 40(1), 203–244.
Maskus, K. E. (2001). “Parallel Imports in Pharmaceuticals: Implications for Competition and Prices in Developing Countries.” Final Report to World Intellectual Property Organization.
Medecins Sans Frontieres. (2002). Untangling the Web of Price Reductions: A Pricing Guide for the Purchase of ARVs for Developing Countries. 3rd ed.
PhRMA (Pharmaceutical Research and Manufacturers of America). (2001). Industry Profile.
Prieger, J.E. (1996). “Ramsey Pricing and Competition: The Consequences of Myopic Regulation.” J. of Regulatory Economics (10), 307–321.
Ramsey, F. P. (1927). “A Contribution to the Theory of Taxation.” Economic Journal (37), 47–61.
Scherer, F. M. (1997). “How US Antitrust Can Go Astray: The Brand Name Prescription Drug Litigation.” International J. of the Economics of Business 4(3), 239–257.
Scherer, F.M. and J. Watal. (2001). “Post-Trips Options for Access to Patented Medicines inDeveloping Countries.” Commission on Macroeconomics and Health Working Paper Series, Paper No. WG4:1.
Short, C. (2002). Secretary of State for International Development. Report to the Prime Minister. UK Working Group on Increasing Access to Essential Medicines in the Developing World. Policy Recommendations and Strategy. 28 November.
Stigler, G. A. (1964). “A Theory of Oligopoly.” Journal of Political Economy 72(1).
Sykes, A. O. (2002). “TRIPS, Pharmaceuticals, Developing Countries and the ‘Doha Solution.’” U.S. Congressional Budget Office (CBO). (1996). How the Medicaid Rebate on Prescription Drugs Affects Pricing in the Pharmaceutical Industry.
Watal, J. (2000). “Pharmaceutical Patents, Prices and Welfare Losses: Policy Options for India Under the WTO TRIPS Agreement.” World Economy 23(5), 733–752.
World Trade Organisation. (1994). Agreement on Trade Related Aspects of Intellectual Property Rights. Marrakesh Agreement Establishing the World Trade Organisation, Annex 1C, 33 ILM 81 (1994). “TRIPS”.
World Trade Organisation. (2001). Declaration on the TRIPS Agreement and Public Health.WTO Doc WT/MIN (01)/DEC//2 (14th November, 2001).
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Danzon, P.M., Towse, A. Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents. International Journal of Health Care Finance and Economics 3, 183–205 (2003). https://doi.org/10.1023/A:1025384819575
Issue Date:
DOI: https://doi.org/10.1023/A:1025384819575