Prescription Drug Import Laws Prove Addictive for Producers
Subject Immigration
Topic Labor Markets
Key Words Import, price, export, manufacturer, distributor, consumers, price controls, market
News Story

Congress is taking new steps to permit the import of prescription drugs from Canada. In 2000, it passed a law that allowed pharmacists, drug wholesalers, and distributors to import low-priced prescription drugs from 26 countries. However, the Clinton and Bush Administrations have refused to issue the guidelines necessary for implementation on the grounds that the drugs might not be safe and that consumers might not benefit.

Currently, federal law forbids the importation of drugs that have been made in, and exported from, the U.S., except by the manufacturer. Its rationale is to protect the consumer from counterfeit drugs. Drug manufacturers and distributors say that this gives them complete custody of prescription drugs from the factory floor to the retail pharmacy. They worry that relaxation of the law might lead to the importation of counterfeit or unadulterated drugs.

Hence Congress is limiting its new bill to Canadian drugs, which are less likely to be unsafe. Imported drugs would have to comply with safety and labeling standards, and would have to be tested for purity.

It is attractive to import drugs from Canada because price controls exist there. Drug companies could be induced to cut their prices in the U.S. as a result. Voters would be happy and Medicare would be more able to afford drug coverage. Concerns include whether Canada has enough prescription drugs to make a difference to U.S. prices, and whether the drug companies would sell drugs to Canada only to see them in the American market, competing with domestic sales.

(Updated December 1, 2001)

1. For price discrimination to exist, two conditions need to be met: the different groups of consumers must be separable, and they must have different price elasticities of demand.
a) Currently, in the U.S./Canadian market, along what lines do monopolist U.S. drug producers separate their main two markets?
b) What allows them to separate these groups of consumers?
c) How do you know that they have different price elasticities of demand?
2. Draw a diagram of a monopolist prescription drug producer that engages in price discrimination and separates its U.S./Canadian market into two parts as you have described above. Be sure to include the marginal and average cost curves and the demand and marginal revenue curves. Show the price in each market segment and the total output.
b) Explain how the drug producer gains through price discrimination.
c) What will happen if drug imports are permitted from Canada into the U.S.? Discuss and illustrate the effects on price discrimination, price, output, and profit.
d) Will the consumer benefit? Why or why not?
Source Robert Pear, "For Price Break on Drugs, Congress Looks to Canada," The Wall Street Journal, September 1, 2001.

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