Importing Drugs: Bad Medicine / Bad Economics?
The conservative argument against importing pharmaceuticals from Canada claims to be one part science and two parts economics with Sally Pipes (Pacific Research Instititute on Public Policy) putting her own formulation to two of the three parts in “Say No to Foreign Drugs”.
Pipes raises the safety issue in an argument that seemingly vascillates from praising the FDA at being better at science than Health Canada (“Foreign regulatory requirements and drug specifications differ”) to arguing the FDA is inefficient and inaccurate at labeling. While I’m not sure if the FDA staff should feel complimented or insulted, I’m sure Canadian scientists might take exception to this safety argument.
The economics has two dimensions with the first addressed by Ms. Pipes in her own twist on the market structure debate. She starts with those dread foreign price controls but she does not falsely assume a competitive market structure where price controls create shortages. Pipes actually acknowledges the market power in the U.S. markets from patent protection but then writes “various middlemen will capture the difference between controlled prices overseas and the market value of the drugs in the U.S.” If only one distributor has the right to import drugs, then perhaps there would be a transfer of monopoly power. But if several distributors are allowed to import drugs, would not competitive forces prevail? What conservative critics of price controls imposed on monopolists often miss is that monopoly power manifests itself in the form of a firm demand curve that is less than perfectly elastic. In the international context where the foreign market is faced with price controls, the relevant demand curve becomes perfectly elastic so the monopolist output decision replicates what would be observed in competitive markets. The U.S. demand curve, however, retains its less than infinite elasticity resulting in rational price discrimination as long as trade protection can segment the markets avoiding the arbitrage problem. If free trade opened up arbitrage, how would the following concern of Ms. Piper manifest itself: “the pharmaceutical producers could simply refuse to sell quantities of drugs overseas greater than those expected to be demanded in the respective countries”?
The second economic dimension comes from the notion that patent protection is needed to encourage R&D. But wiser scholars than I have noted that patent protection may not be the optimal means for encouraging R&D. In the pharmaceutical sector, an additional concern is that patent protection leads to extensive promotional efforts. This paper by Kurt R. Brekke and Michael Kuhn is an interesting discussion especially in its modeling of how competition in the form of detailing versus direct to consumer advertising may be exhibited in a duopoly market – whether the market has price controls versus no price controls. Brekke and Kuhn treat each regulatory regime as distinct and segmented markets. I have not seeen, but it would be of interest, how their model would treat the opening of trade between a market with price controls and a market with no price controls.