South-Western College Publishing - Economics  
Drug Discrimination
Subject Price Discrimination
Topic Monopoly
Key Words Companies, prices, manufacturers, consumers, research and development, costs, benefits, uninsured
News Story

Republican Senator Slade Gorton of Washington is drafting legislation that would prevent drug companies selling drugs at a different price in the U.S. compared to Canada or Mexico. The reason is that the manufacturers are charging Canadian consumers 64 percent less on average for the ten most commonly prescribed drugs than consumers in Washington state. Americans are forced to pay most of the research and development costs of drugs sold round the world. Senator Gorton believes that his proposal will put pressure on other countries to permit higher drug prices and ensure that Americans pay lower prices. The uninsured and the elderly who have no drug benefits would benefit.

The drug companies are alarmed. They claim that the proposal is tantamount to price controls. Glaxo Wellcome's lobbyist says that it would be "disastrous for American consumers, our industry, and research everywhere."

(Updated June 1, 2000)

Questions
1. What conditions exist that enable the drug companies to charge different amounts in Canada and the U.S. for the same drug?
2. Draw a diagram of the industry equilibrium for a particular drug where the drug company has a monopoly because of a patent. Include the marginal and average total cost curves and the average and marginal revenue curves. Mark the equilibrium price and quantity assuming that a single, uniform, price is charged.
  a) Now assume that the company sells the drug at a higher price in the U.S., and at a lower price in Canada. Draw the (discontinuous) price line and show the overall quantity sold.
  b) Why are Senator Gorton and American consumers unhappy? Refer to the price level and the consumer surplus in the U.S. Illustrate your response.
  c) Why are the drug companies anxious to fight the proposal for standard prices across countries? Refer to the amount of profit and the size of the producer surplus. Illustrate your answer.
3. The Glaxo Wellcome lobbyist states that Senator Gorton's plan is disastrous "for American consumers, our industry and research everywhere." Is she correct? Explain using economics.

 

Source
Robert Pear, "Drug Price Issue Catching Fire in Senate," The New York Times, April 6, 2000.

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