The Pharmaceutical Industry and the AIDS Crisis in Developing Countries

1952 Words Jul 17th, 2007 8 Pages
The Pharmaceutical Industry and the AIDS Crisis in Developing Countries
· Describe the nature of supplying drugs to emerging markets at an affordable price without undermining their profits
· Research and analyse in depth the effectiveness of one proposed policy response to this issue.
Introduction

1 2001 saw a flurry of events, as highlighted in the excepts of the case study, which caused an awareness by the international community of the inequality between rich and poor nations in the care and treatment of people living with HIV/AIDS.

2 Epitomized by the lawsuit against the South African government, the drug companies "want desperately to be seen helping fight the global AIDS crisis… but the companies also remain unwavering in
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By setting at this price, it could largely meet the demands for the patients in high-income countries, but it also meant that the demand of the low-income countries would not be met since they were unable to afford the price. (This is also due to the relatively higher elasticity of demand in low-income countries.) Sold in the market at a uniform price, the total revenue (price x quantity) for the drug companies is thus maximized. The surplus of revenue over marginal manufacturing costs would fund the sunk costs (of R&D and factory building) and any profits.

Rationale for Lower Prices – Price Discrimination

9 However, with mounting pressures from the public to provide greater access to the drugs especially to the lower-income countries, as well as to counter the increased competition from generic drugs, the drug companies have adopted a different pricing policy. Economic theory also emphasizes that firms in monopoly (or oligopoly) position can rationally practice price discrimination. This means that the drug companies can offer different prices for the same product according to the characteristics of each segment of the demand on markets.

10 It would be the firm 's rational behaviour to offer the highest prices for customers with the lowest price elasticity of demand (and the highest willingness-to-pay), in this case, to maintain the high price for high-income countries. On the other hand, the firm can also
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