Lifting the lid on illegal pharmacies Legal and illegal pharmacies offer different benefits to customers, and an increasing number of people are turning to illegal channels to buy drugs, potentially putting themselves at risk. We spoke to Professor Luis Diestre about his work in analysing the competitive dynamics of the informal economy and its implications for regulation. The pharmaceutical industry
is an important part of the global economy, with major companies investing large sums to develop, manufacture and distribute more effective drugs to treat disease. Outside the formal part of the economy, pharmaceutical products are also bought and sold in the informal economy, yet little is known about competitive dynamics in these environments beyond the reach of laws and regulations. “We know a lot from management literature about how legal firms compete, but not so much about competition in illegal environments,” says Luis Diestre, an Associate Professor at IE Business School in Madrid. This is a topic Professor Diestre is addressing in the ERCfunded ILLEGALPHARMA project, using data gathered from the US, which has some important differences with the European market. “Drug prices are much higher in the US than in Europe. It seems that more people rely on illegal sources for their drugs, because of the price differential,” outlines Professor Diestre.
IllegalPharma A second important difference is that it is relatively easy to identify a benchmark for comparison in the US market, whereas each European country has different regulations and there are wide price variations. Data has been gathered from a variety of sources, including illegal online pharmacies and legal ones, which Professor Diestre is analysing
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in search of deeper insights. “The basic idea here is that the legal and the illegal channels provide different benefits. The legal channel provides safety – a customer going to a physical pharmacy will know that that pharmacy is regulated and that the drug they are buying is safe. So if you are getting a prescription drug, you know that this drug is good for you,” he says. This is not the case however with an illegal pharmacy, at which it is possible to buy drugs without a prescription,
significant proportion of cases the price of the illegal drug was higher than a legal one, even though the illegal pharmacy does not guarantee the safety of the drug,” explains Professor Diestre. One area in which an illegal pharmacy does have an advantage however is in maintaining individual privacy, which may affect drug prices. “If you don’t need a prescription then you don’t need to go to a doctor to be tested or diagnosed, and you don’t need to go to the counter to disclose
Legal and the illegal channels provide different benefits. The legal channel provides safety – a customer going to a physical pharmacy will know that that pharmacy is regulated and that the drug they are buying is safe –, whereas the illegal channel provides greater levels of privacy. which entails risk. “Is this drug right for me? And how do I know that the drug has been produced and assessed in a clean way? So there are some risks involved,” points out Professor Diestre. The legal pharmacy has an advantage in this respect, so on this basis we might expect prices for drugs from legal sources to be higher than those from illegal ones. Price is an important commercial consideration, and while on average illegal drugs are less expensive than legal drugs, there’s a high degree of variability. “We found that in a
what may be very sensitive information. You also don’t need to disclose information to your insurance company about your health record,” says Professor Diestre. “In that sense an illegal pharmacy gives a degree of privacy which you cannot get through legal channels.” This may be an important consideration for some individuals, maybe because they want to keep sensitive information private, or to keep their health insurance premiums as low as possible. In the project, Professor Diestre is looking at the value that patients with certain stigmatised conditions – like mental health
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conditions or sexually transmitted infections – attach to privacy. “Our prediction here is that these types of customers will value the benefits that the illegal channel provides more strongly, and this should translate into two things. First, we should see more of these drugs being offered in illegal pharmacies. And secondly, the price should be relatively higher in comparison to the legal one,” he outlines. It is not easy to gather data in this area; researchers are analysing forums commonly used in the US in which people express their feelings about being diagnosed with certain conditions. “We’re trying to capture the extent to which the way people talk or write about these diseases implies that there is some sort of stigma associated with them,” says Professor Diestre. The aim here is to identify which diseases are linked to certain stigmas, from which researchers can then look to investigate the impact of this on drug prices. Through careful statistical analysis, Professor Diestre hopes to see whether higher degrees of stigma lead to higher illegal prices relative to those in legal channels. “Sometimes we find that there is a premium, that people have to pay a higher price for the illegal drug than they would pay in legal channels,” he says. The local context matters in this respect, and geographical, demographic and socioeconomic factors can affect which conditions are stigmatised, issues Professor Diestre has taken into account. “We’re using data from the Medical Expenditure Panel Survey, which is performed in the US every year. From this survey we can get information about geography and demographics, such as gender, age and socio-economic status of consumers of particular drugs,” he continues. “We control for these variants and try to explore the data in a richer way, to see if we can identify certain patterns.”
European market This research has been conducted using data gathered from the US, yet illegal pharmacies are also a problem in Europe, where the amount of counterfeit and illegal drugs being purchased is estimated to be growing. This trend is likely to be accelerated further by the Covid-19 pandemic, underlining the importance of effective regulation, which is a major motivating factor behind the project. “There is evidence that some of the people purchasing illegal drugs are suffering serious side-effects that could be avoided. This represents a big threat to public health - we believe that one of the ways in which we can attack this problem is through better regulation,” explains Professor Diestre. Regulation needs to be underpinned by a deep understanding of why people buy drugs from illegal sources in the first place. “If we can somehow diminish the main advantage of illegal pharmacies – privacy – then maybe this is a way to address this,” says Professor Diestre. Many people are becoming increasingly used to buying products online, yet it can be difficult to distinguish between legal and illegal pharmacies online. This is an issue Professor Diestre plans to investigate in future. “We’re very interested in seeing how these websites try to deceive customers and regulators, to avoid being shut down, and to convince customers that they’re legitimate and trustworthy,” he says. There are also plans to investigate other issues around illegal pharmacies. “We want to understand the incentives for an illegal pharmacy to sell low-quality drugs. The fact that a source is illegal does not necessarily imply that its products are low-quality or contaminated – we suspect there will be a lot of variability,” outlines Professor Diestre.
IllegalPharma Competitive Dynamics in the Informal Economy: The case of Illegal Pharmaceutical Drugs Project Objectives
Our objective is to explore the competitive dynamics between legal and illegal businesses. We look at the sale of medicines in online pharmacies to estimate (1) the probability that a medicine is offered in an illegal pharmacy and (2) the gap between legal and illegal prices.
Project Funding
This project has received funding from the European Union’s Horizon 2020 research and innovation program under Grant agreement ID: 715536 (EU contribution: € 1 374 185).
Research Team
Antonella Fazio E: Antonella.Fazio@ie.edu Yasser Fuentes E: Yasserismael.Fuentes@ie.edu
Contact Details
Project Coordinator, Professor Luis Diestre IE Business School Associate Professor Strategy Department T: +34 915689600 E: luis.diestre@ie.edu W: https://sites.google.com/a/faculty. ie.edu/l-diestre/home
Professor Luis Diestre
Luis Diestre is an Associate Professor at IE Business School. He received his PhD in Strategic Management from the University of Southern California in 2009. His research interests evolve around two distinct topics: Non-market strategy and R&D activities in the Biopharmaceutical industry. Currently he serves as an Associate Editor of the ‘Academy of Management’ Journal.
www.euresearcher.com
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