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Trade Therapy: Deepening Cooperation to Strengthen Pandemic Defenses
Box 3.2
Pricing policies for medical goods in the context of international trade
Universal health coverage ensures the right of everyone to access safe, quality-assured, effective, and affordable medicines.a Affordability depends on the price of medicines and one’s income. The World Health Organization (WHO) works with countries to set pricing policies that reduce market prices so health systems don’t have to spend resources subsidizing medicines for low-income patients. Pricing policies guide price negotiations within a specific country and can involve the publication of reference prices and regulation of tendering and procurement processes. Other pricing policies regulate prices directly by fixing prices, restricting markups in the distribution chain, or providing tax exemptions. Third-degree price discrimination Offering lower prices to more price-sensitive buyers is known in economics as thirddegree price discrimination and can increase both sellers’ profit and patients’ access. For example, early in the COVID-19 pandemic, Moderna had one of the most expensive vaccines on the market, priced at US$30 per dose. At this price, the African Union declined to order doses of the Moderna vaccine and instead ordered doses of Johnson & Johnson’s Janssen vaccine, which was priced at only US$7 per dose. Eventually, Moderna dropped its price to US$7 per dose, and the African Union placed orders for its vaccine. Since US$7 per dose was still above cost, Moderna would make a profit on these sales. Because the new price was affordable to African Union members, access to the vaccine also increased. Reference prices Despite the mutual benefit for developers and patients of offering lower prices to more price-sensitive buyers, these lower prices may not emerge naturally owing to the unique characteristics of the medical goods market—creating a role for pricing policy. Because of the home market effect, medical goods exporters are concentrated in a few large countries, and producers may not be able to recognize differences in demand across countries, leading them to offer a uniform price that is unaffordable to some. Even when multinationals do enter countries like India, a lack of information may keep them from building out marketing and distribution networks, leading to limited access within the country (Goldberg 2010). Reference prices provide guidance to exporters about how to price appropriately in a specific market to ensure access. Another problem is that, even if manufacturers are willing (as was Moderna) to charge lower prices to more price-sensitive customers, intermediaries in the supply chain may nonetheless charge a markup over the manufacturer’s preferred price—an economic problem called double marginalization. Pharmaceutical markets in low- and middle-income countries are dominated by a single or small number of intermediaries, and public procurers and consumers in these markets pay higher prices than buyers in high-income countries. Access to information on reference prices in external markets reduces the information asymmetry between buyers and sellers, providing buyers with more bargaining power. (Continued)
