Volume 5, Issue 1 2005 Article 16
Price Discrimination and Smuggling of AIDS Drugs
Richard A. Hornbeck∗
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Hornbeck: Price Discrimination and Smuggling of AIDS Drugs
I. Introduction Within the debate over proper responses to the AIDS epidemic, one contentious issue is how to encourage both the discovery and the distribution of medicines able to treat the disease. Without government intervention, there would be few incentives to research new medicines. As a consequence, governments encourage research by granting patents to pharmaceutical companies, allowing invented medicines to be priced far above their marginal cost of production. There has been considerable investment in developing AIDS drugs to the benefit of many, yet firms’ chosen prices have made them unaffordable for millions worldwide. If these firms were able to charge different prices to different groups of consumers, i.e., price discriminate, it could be possible to spread the use of AIDS drugs considerably while maintaining research incentives. The economics of price discrimination have been studied in depth (Phlips, 1983; Tirole, 1988) and it has been successful in distributing low-cost vaccines in the developing world (JFK, 1997). Price discrimination (a.k.a. Ramsey pricing, differential pricing, tiered pricing, equity pricing) is an intuitive mechanism for improving the distribution of AIDS drugs, as well (Hammer, 2002; Scherer and Watal, 2002).1 However, price discrimination is only possible to the extent that AIDS drugs sold at low prices could not be