In a market economy, the interaction of producers and consumers determines the price of goods and services. Understanding the theory of supply and demand helps explain how prices are determined, and this theory also explains how responsive (elastic) both supply and demand are to changes in price. For example, medicines that are not considered essential and that the buyer could credibly refuse to purchase will have more elastic prices, whereas the prices of medicines that are considered essential and that the buyer must obtain will be inelastic, meaning buyers will be less sensitive to higher prices.
Factors that interfere with the ability of the market to efficiently produce and allocate goods and services are said to result in “market failure.” An example of market failure is when buyers do not have the same level of knowledge; for example, some buyers might pay more than others for the same medicines because they are unaware of what everyone else is paying.
When buyers or sellers have market power (monopoly or monopsony), they can distort how the market price mechanism works. For example, in absolute monopolies (one seller) and oligopolies (a few sellers), the seller has significant ability to set prices, because the consumer has limited choices. This distortion allows the seller to command a price that is higher than would have prevailed under more competitive situations. In a monopsony, where the government has market power as the only large buyer in the market, the government acts on behalf of consumers to obtain better prices.
In addition to these economic theories of price determination, prices for medicines are influenced by the fact that medicines have certain traits that set them apart from other consumer products. For example, consumers need expert advice to make rational choices between using and not using a medicine and about what kind of medicine to use. This advice is provided by prescribers, who may not know or even care about the price of medicines. Medicines also serve as an investment in future health, which may be difficult for the consumer to value.
The literature unanimously concludes that medicine price differences exist between countries, even when comparing between or within the strata of industrialized, middle-, and low-income countries. Price variation within countries is more likely in less price-regulated markets, such as the United States; however, prices vary in other countries, where public, private, and nongovernmental (not-for-profit) sectors procure medicines separately. Variable prices for medicines within and between countries often result from -
- The pharmaceutical manufacturer selling the same product for different prices
- Intra- and intercountry differences in the margins charged in the post manufacturing supply chain by wholesalers, distributors, and pharmacists, as well as taxes and co-payments levied by the state
Conducting pharmaceutical price comparisons is challenging, but such assessments can identify price variations and provide valuable information on their source and on interventions that can help reduce medicine prices. For example, margins and taxes charged along the pharmaceutical supply chain can add significantly to the final price of medicines; however, governments can control these markups by enacting price-control policies and eliminating tariffs and taxes. In addition, buyers of pharmaceuticals should assess their own position in the marketplace and use tactics such as price negotiations, pooled procurement, and information sharing to increase their market power.