Pharmaceutical Arbitrage: Balancing Access and Innovation in International Prescription Drug Markets

Abstract:     
While neoclassical economic theory suggests that arbitrage will undermine global differential pricing of pharmaceuticals, the empirical results are more complex. Pharmaceutical regulation, IP laws, global trade agreements, and company policies support differential pricing despite the pressure of arbitrage. For essential access programs in particular, the theoretical threat of pharmaceutical arbitrage is shown to be rarely observed empirically. Counterfeiting is demonstrated to be the more serious threat. These conclusions call for changes in the U.S. PEPFAR program for AIDS and in the implementation of the WTO TRIPS Agreement.

A more fundamental question, however, is whether pharmaceutical differential pricing is appropriate for consumer welfare. The usual defense of the practice within the OECD is grounded in the need for innovation incentives. This Article proposes and applies the heuristic of globally optimal appropriation (including patent rents). The heuristic alters some of the received wisdom on pharmaceutical pricing, suggesting that nonrival access to prescription drugs can be provided to low and middle income populations for all global diseases without harming innovation. By contrast, arbitrage between high income countries, such as the importation of Canadian drugs into the U.S. over the Internet, is shown to be consistent with optimal innovation incentives.

Keywords: WTO, TRIPS, Doha, Essential Medicines, innovation, access, pharmaceutical, differential pricing, price discrimination, diversion

JEL Classifications: H41, H51, I18, K11, K19, K32, K33

Accepted Paper Series