U.S. pharmaceutical companies charge different prices for prescription drugs to buyers
U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. Explain why these companies, for profit reasons, oppose laws allowing re-importation of drugs to the United States. LO12.6
Price discrimination is a common feature of monopoly. It can charge different prices for the same product or service depending upon the consumer's elasticity and ability to pay. Pharmaceutical companies have a high R&D cost and exercise economies of scale. They have patents for their products to prevent other firms from copying them.
A pharmaceutical company might practice price discrimination based on differences in elasticity of demand or price ceilings and extract the maximum profits. However, when reimportation laws are imposed, it would no longer be profitable. This is because reimportation inherently implies reselling of these drugs from one country to the other. Consequently, the country in which Country U would be charging higher prices would prefer to buy from the country where Country U has sold them at a much cheaper price and re-export the products back to Country U. The companies in Country U will obviously oppose laws allowing reimportation of drugs, because it would longer allow them to extract maximum profits from all the countries.
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