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Home Publications Blogs Beat the Press Protectionism Leads to Corruption # 27,453: The Case of Drug Patents, Again

Protectionism Leads to Corruption # 27,453: The Case of Drug Patents, Again

Saturday, 14 August 2010 07:30

The NYT tells us that the Feds are investigating drug companies again. It appears that they were making payoffs to foreign doctors to get them to prescribe their drugs.

A brief reference to econ 101 would be helpful here. Economists like it when goods sell for their marginal cost. Trade barriers like tariffs or quotas often raise the price of items by 20-30 percent above their marginal cost. The extra profit created by this gap provides the protected industry with an incentive to engage in corrupt activities like payoffs to politicians to preserve their protection.

Drug patents can raise the price of protected drugs by more than 100 times (10,000 percent) above the free market price. This gives them very large incentives to engage in corrupt activities, so we should not be surprised to find out that they do.

Comments (7)Add Comment
What is so special about drugs
written by Tom, August 14, 2010 8:14
Patents in other markets do not typically raise prices by a factor of 100. What else about the drug market explains this? Regulatory approval?
Corrupt foreign drug trials
written by caustic, August 14, 2010 9:22

Far worse than bribing MDs to prescribe their drug brands - an old, old story - is the other leg of the DoJ inquiry. Namely that pharma companies may have paid foreign MD investigators on new drug trials to fudge results. The apparent omission of deaths in an Avandia trial has given rise to this concern.

Big Pharma is planning to shift trials to China. It's not just the cost saving - it's the opportunity to get the results you want.

We need a protective (and protectionist) law requiring new drug trials to be run in the US and a few ethically trustworthy nations to be considered by the FDA in deciding whether to allow a new drug on to the market.

We are already letting Big Pharma save a few cents per pill and destroy a few thousand US jobs by importing most active pharmaceutical ingredients from China. That's insane, given Chinese lack of quality control and business ethics, combined with the difficulty of testing for product purity and safety when the paper trail is potentially corrupted. But even more insane would be approving new drugs on the basis of fiction-prone 3rd world trials.

written by Ruchi, August 14, 2010 5:36
But how likely is it that this investigation's conclusions will draw the connection between protectionism and corruption? Payoffs to foreign doctors are among a larger set of problems caused by protectionism as it is currently in effect. Yet it doesn't appear as though these policies are going anywhere fast, and Big Pharma certainly isn't about to let this particular lesson from ECON 101 to become too glaringly obvious.
written by diesel, August 16, 2010 12:28
You get a root canal and your dentist writes you a prescription for 15 codeine and aspirin which cost around six bucks at your pharmacy. Just 50 miles away, across the border, 250 codeine and aspirin purchased over the counter at a Canadian pharmacy, requiring only your signature, without a prescription, costs six bucks.
we all need snake oil
written by frankenduf, August 16, 2010 8:20
yo Tom- one special thing about the drug market is that we are all naturally marketed to need it- think about it- if some aweful condition were to befall you, you will naturally desire to pay almost anything to fix it (if the problem is worrisome enough)- drug pushers exploit this vulnerability by gouging the victim- this is one of the reasons why AIDS patients tactically had to lobby the government to intervene in the price market, so that the drugs were accessible to more citizens
written by liberal, August 16, 2010 8:56
Economists like it when goods sell for their marginal cost.

Ask yourself, Dean---what's the marginal cost of a parcel of land?
written by liberal, August 16, 2010 8:58
Tom wrote,
Patents in other markets do not typically raise prices by a factor of 100.

False. If we extent "patents" to "patents and copyrights," then the price of Microsoft products are far greater than their marginal cost, which is merely the cost of storing and transmitting the bits. Well more than 100X.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.