February 10, 2004

Politics on Drugs

Posted by shonk at 12:41 AM in Economics, Politics | TrackBack

In a very thoughtful article in Wired, “Stop Making Pills Political Prisoners”, Lawrence Lessig addresses the following issue: many people in poor countries are dying because the drugs that could save their lives are too expensive.

This behavior outrages many in the developed and developing worlds alike. How can drug companies be so callous? How can they deny medicine to millions just so they make more money?

The pattern also puzzles economists. Patents give drug companies monopolies over their products. The rational strategy for a monopolist is to price-discriminate, to charge more in places that can afford it and less in places that can’t. For example, with price discrimination, it would make economic sense to charge Africans practically nothing for drugs sold in Africa, as long as the same product could be sold in the US for lots more.

So what’s the problem? Why doesn’t this sort of benign price descrimination result in cheap drugs for the third world? As Lessig notes, arbitrage is a problem, but not an impossible one.

Another reason is more intractable: the grandstanding politician. If big pharma price-discriminates rationally, it guarantees the following query from some representative in some committee hearing: “How come a hospital in Lagos spends $1 for this pill, but the local Catholic hospital in my district must pay $5,000?” And, of course, in the Inquisition that is congressional testimony, there is no effective way to answer such a question. Graphs about monopolies and proofs about the benefits of price discrimination don’t get you far on Capitol Hill. The rational drug company thus expects that rational price discrimination would lead to irrational price control - and the end of the ability of big pharma to earn enough from high-paying countries to support the cost of developing drugs.

Yet again, we see the justification of the equation

rational ignorance + public choice = massive suffering

It is quite rational for the politician to be ignorant of the beneficial side effects of price discrimination; after all, his overriding priority is to get re-elected, and the people in Lagos aren’t casting ballots in Congressional District 3 (hence the public choice part of the equation). Now, one might well argue that a congressman has no duty towards the people dying in Lagos. Be that as it may, the simple fact of the matter is that the hypothetical drug company being discussed will charge a profit-maximizing price in as many places as it can, so the politician is really doing his constituents no good by grandstanding about the price-discrimination. The net effect is that everybody (except the politician) is the same or worse off than they would be otherwise.

Just to make things perfectly clear, I would just like to point out that, although the proximate cause of unneccessary suffering and death in Lagos is, as the anti-globalizationists point out, the greed of big corporations, the ultimate cause is, in fact, the self-serving state. By which I mean to say that, indeed, the reason cheap drugs aren’t widely available in the third world is exactly because it’s not profitable for the pharmaceutical corporations, which have profit as their number-one priority. However, the reason offering cheap drugs to the third world isn’t profitable (at least in this scenario) is not because of “market failure”, stunted morality or any of the standard reasons, but rather because of the perverse incentives created by state action. And not just malicious state action, either: as I’ve pointed out, the politicians who would potentially intervene and try to stop price discrimination are not acting irrationally, given their incentives, nor are they actively trying to screw over the third world. I’m not a fan of corporatism, but I do feel sorry for those in charge of big corporations who get the blame for the problems in the third world when the blame rightfully lies at the feet of the same people who have managed to hoodwink the public into believing that they offer a solution. That Which is Seen, and That Which is Not Seen, indeed.

At this point, it seems appropriate that I insert a caveat. I’m not trying to justify the patent system in this post, as anyone who is a frequent reader is probably aware. Rather, if patents are going to be enforced, it seems to me that they ought to be enforced consistently. That is to say, part of the justification for patents is precisely the sort of beneficial price discrimination being discussed, since the arbitrage hurdle is more difficult to clear absent a legal monopoly (by arbitrage, I mean someone buying pills in bulk for a buck in Lagos and then selling them for a fraction of the $5000 price tag in New York), so it simply makes no sense to justify the patent system on one hand with beneficial price discrimination while effectively never allowing that price discrimination to take place.


As an addendum, I'd like to point to a good example of what I'm talking about in today's New York Times in an article on how Romania seems to be beating AIDS:

bq. The company [Merck] now "sells these drugs at no profit in Romania," said Dr. Adrian Caretu, manager of Merck's office here. By 2002, five other drug companies had either cut prices or offered to donate two or three free anti-retroviral pills for each one bought here.

bq. _Most chose to donate, explained Eduard Petrescu, the country's Unaids adviser, because European governments often use prices in nearby countries as a guide for setting drug prices_. The drug companies, he said, "feared this would open the door to price reductions across Europe." [Emphasis added]

Posted by: shonk at February 10, 2004 11:36 PM

What is really the issue here is drugs for AIDS and the African form of malaria. (falciparum malaria) The best drugs for these diseases are patented. Google search under ďAids drugs for AfricaĒ for an overwhelming amount of information. It looks like the U.S. government and others are getting ready to really try to do something about this problem, buying some drugs for the Africans. I doubt that it will be enough to have a real impact. (see below)
There are lots of effective generic drugs that that work on other diseases but are in short supply due to the poverty and poor governance in Africa. Also, most good health is due to public health measures and such things as immunization, clean water, good nutrition, housing, etc.

The advantages of discounting patented drugs for foreign sales has not gone unnoticed by the drug companies, which sell at a considerable discount in Canada, Mexico and other countries

Posted by: Dave at February 11, 2004 10:49 AM

The advantages of discounting patented drugs for foreign sales has not gone unnoticed by the drug companies, which sell at a considerable discount in Canada, Mexico and other countries

Keep in mind that, at least in the case of Canada, the drug companies sell at a discount there, not necessarily out of choice, but because they are forced to do so by the Canadian government. I'm not saying your point doesn't hold, just that Canada is probably a bad example.

Posted by: shonk at February 11, 2004 11:17 AM

I have another example of how hyper- politicization of business decisions ends up costing lives. Hardly any all the bad health effects of tobacco are thought to be due to nicotine People crew Nicorette gum and wear nicotine patches without any adverse health consequences. Many of them still canít stop smoking and will die a painful death, because they canít do without that nicotine rush you get from smoking.
Most of the damage is caused by the tar and particulate matter. The cigarette companies tried to make cigarettes safer by reducing the tar and nicotine, but then the smokers just inhaled more deeply and smoked more. These cigarettes were shown to be just as unsafe as the old ones.
In the 80ís one company (DNA Plant Technology) secretly developed a genetically engineered super high nicotine tobacco for a major tobacco company and grew it in Brazil. This might possibly have led to a safer cigarette.
When it got out that this tobacco had been developed the company was accused of evilly creating a more addictive tobacco. They dared not even defend themselves. Who knows if it may have worked, but we will never know.

Posted by: Dave at February 11, 2004 09:03 PM

I was under the impression that nicotine, in addition to being highly toxic, was also a carcinogen. Is that not true, or is it just that amount of nicotine in a cigarette is so miniscule that any adverse effects it may have are overwhelmed by the damage from tar?

Posted by: shonk at February 12, 2004 12:55 AM

You are right that nicotine is highly toxic. Just 60 mg. can kill you. Death is by convulsions followed by coma and respiratory failure. A cigarette delivers less than 1 mg of nicotine, if I remember. It is not a carcinogen or all those people wearing nicotine patches would risk skin cancer. Nicotine is highly addictive. According to a pharmacology book (Goodman and Gilman), only 20% of people in smoking cessation programs are able to quit for 12 months. A lot of people not in any program quit. (Personal observation) Nicorret gum and patches suppress withdrawal symptoms. You canít smoke in hospitals and they do offer patches and gum to the patients. Never the less, I have seen patients standing out in front of the local hospital in pajamas holding up their intravenous fluid poles with one hand and smoking a cigarette with the other.

Posted by: Dave at February 12, 2004 10:45 AM