Thursday, July 18, 2002

drug hangups Send this entry to: Spurl Ma.gnolia Digg Newsvine Reddit

drug hangups The Senate voted to allow re-importation of prescription drugs from Canada, where they are cheaper. Andrew Sullivan is already throwing a hissy fit, though I'm still puzzling over what the effect will be. Drugs are cheaper in Canada "because Canadaís national health-care system forces drug companies to discount their prices." Hang-up #1: I don't believe the government should set prices. But I do believe that buyers should be allowed to choose a maximum price they're willing to pay (above which no transaction takes place). Neither of these is terribly controversial. But what happens when the government is (for the most part) the only buyer of prescription drugs and demands deep discounts? Is this price-fixing or hard-bargaining? I don't know. Hang-up #2: I like free trade. I like removing trade barriers. But it's not clear to me what will happen if we remove a trade barrier separating the Canadian market (which has, essentially, one buyer and one seller) from the US market (which has one seller but many buyers). I've written about price discrimination on drugs before, though I assumed many buyers in each market. The hard part of thinking about this is imagining what the Canadian government's demand for drugs looks like. If forced to pay a higher price, would they buy progressively less drugs (and just be stingier about handing them out)? Or would they buy no drugs at all? If the anti-importation laws were simply allowing drugcos to price discriminate freely between the two markets, then it's pretty clear that they'd be made worse off by removal of the barrier. But isn't it possible that removing the barrier will dilute the Canadian government's buying power and ability to set prices? Isn't it conceivable that the drugcos will be able to credibly tell Canada "with the new re-importation laws, we simply can't give you good discounts anymore"? In short, isn't it (paradoxically) possible (though by no means certain) that such a move might actually be good for the drugcos? [I've covered several sheets of graph paper trying to make sense of this, but I don't do my best work at 2:30am. Maybe one of you will leave me an inspiring comment while I sleep?]

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