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Submitted By kavin1023
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Topics in Economic Analysis & Policy
Volume 5, Issue 1 2005 Article 16

Price Discrimination and Smuggling of AIDS Drugs
Richard A. Hornbeck∗


Copyright c 2005 by the authors. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher, bepress, which has been given certain exclusive rights by the author. Topics in Economic Analysis & Policy is one of The B.E. Journals in Economic Analysis & Policy, produced by The Berkeley Electronic Press (bepress).

Price Discrimination and Smuggling of AIDS Drugs∗
Richard A. Hornbeck

Patent-holding pharmaceutical companies are shown to be imperfectly able to charge differential prices for AIDS drugs due to the potential for black market exchange. Thus, greater segmentation in the international market through additional barriers to smuggling would induce firms to charge lower prices for AIDS drugs in poorer countries. Without these additional barriers, widespread drug distribution through mandated lower prices or weakened patent protection in the developing world would result in smuggling, undercutting demand in developed markets and reducing firms’ research incentives. By contrast, further market segmentation would allow policy makers to go beyond the induced price cuts and remove patent protection in many markets where the benefits to increased distribution would likely outweigh the losses to research incentives. KEYWORDS: price discrimination, differential pricing, AIDS, arbitrage, smuggling

I thank David Autor, Gary Becker, Steve Cicala, Valentin Estevez, David Genesove, Daniel Gottlieb, Thomas Hubbard, Victor Lima, and anonymous referees for helpful comments.…...

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