Does Price Reveal Poor-quality Drugs? Evidence from 17 Countries
(2011; 43 pages)

Substandard and counterfeit drugs represent a global public health crisis. However, there is little economic analysis of the market given the paucity of data. Focusing on 8 drug types on the WHO-approved medicine list, we constructed an original dataset of 899 drug samples from 17 low- and median-income countries and tested them for visual appearance, disintegration, and analyzed their ingredients by chromatography and spectrometry. Fifteen percent of the samples fail at least one test and can be considered substandard. After controlling for local factors, we find that failing drugs are priced 13-18% lower than non-failing drugs but the signaling effect of price is far from complete, especially for non-innovator brands. The look of the pharmacy, as assessed by our covert shoppers, is weakly correlated with the results of quality tests. These findings suggest that consumers are likely to suspect low quality from market price, non-innovator brand and the look of the pharmacy, but none of these signals can perfectly identify substandard and counterfeit drugs. Indeed, many cheaper non-innovator products pass all quality tests, and are genuine generic drugs. This suggests that policies in favor of these more affordable generic drugs may potentially weaken the signaling effect of price and increase the opportunity for counterfeit entry into the market. One way to counter this effect is directly providing better information about drug quality.

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