Published In: The Washington Times
We've all had the experience. You're riding in an airplane and discover that the person in the next seat paid $200 for his ticket, while you paid $800 for yours. Or maybe it was the other way around. Maybe you had the cheap fare and your seatmate paid top dollar.
Either way, one of you probably felt cheated. And that raises a natural question: Should government do something about these "injustices"? For example, should selling the same plane trip to different passengers for different prices be illegal? Or should passengers with cheap tickets be able to resell them to passengers who would otherwise have to pay a lot more?
Right now, no one in Congress is giving much thought to airfares. But they are giving a lot of thought to a similar problem: different prices for the same drug sold in different countries.
For example, some well-known brand-name drugs are selling in Canada from one-third to one-half off of the lowest price available in the United States. Although for generics, prices are often lower here. At last check, Zoloft (for depression) was selling for one-third of the U.S. price in Mexico and about half the U.S. price in Luxembourg and Austria. AIDS drugs like AZT are sold in South Africa for about one-tenth the U.S. price.
One reason prices are lower in other countries is that governments impose price controls. But even if governments were not involved, prices would tend to differ for another reason: like airlines, drug companies practice discrimination.
Economists tend to take a much more benign view of price discrimination than ordinary mortals. The reason? Price discrimination is a way of making products available to people who otherwise could not afford them. For example, if the airlines had to charge one uniform price, there would be no cheap fares for price-sensitive weekend travelers. A lot of family visits and short vacations would just go by the wayside.
Price discrimination may also create benefits for people who pay top dollar, precisely because high-paying business travelers have a choice of more flights to more destinations than would otherwise be the case.
Similar principles apply in the international market for drugs. If an imaginary world court were able to impose a one-price-for-all rule on all countries, the price of AIDS drugs would not fall very much in this country. But prices would probably double or quadruple in places like South Africa, pricing millions of victims out of the market.
Plus, with fewer people buying drugs in a smaller international marketplace, drug companies would have a reduced incentive to invest in the next generation of pharmaceuticals. Research and development would plummet and the consequences would be bad for future patients, regardless of where they live.
Does that mean that different prices for different customers is always a good thing? Not at all. In fact there is a natural tendency for price differences to be eliminated by normal market forces.
Two hundred years ago, Adam Smith, the father of economics, wrote about this tendency in the "Wealth of Nations." The British Corn Laws outlawed "forestalling" and "engrossing," – arbitrage activities of middlemen who bought grain where the price was low and resold it where the price was high. Smith compared attempts to outlaw these activities to laws against witchcraft.
He showed that the activities of middlemen were beneficial, evening out the price for all consumers. He was so persuasive that the Corn Laws were eventually repealed, an event that ushered in the era of free market capitalism that we still benefit from today.
So where does that leave us with respect to drugs? Probably somewhere between two extremes. A study by the National Center for Policy Analysis found that drug prices vary widely within the United States. Savvy consumers can cut costs by 90 percent in many cases by getting on the Internet and shopping for drugs the way they shop for bread.
What about crossborder purchases? The problem is safety regulation. Although I'm not a big fan of the Food and Drug Administration, the agency is supposed to assure the safety of drugs bought by Americans. And that's hard to do when the drugs come from outside the United States.
Although there are Canadian pharmacies that will (illegally) sell drugs to American patients, there are risks. One study found that one-third of these pharmacies are not really located in Canada. They could be in China, or somewhere else. And counterfeit drugs, which are a problem anyway, are more of a problem when the seller is outside our borders.
A reasonable policy is to allow each country to have its own market and pass its own laws. Drugs coming in from abroad should be subject to the same safety requirements as drugs produced here.
Beyond that, we should encourage consumers to engage in smart buying and let the market work.