[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

International Perspective
SOUTH AFRICA, AIDS, AND PRICE DISCRIMINATION
In perfectly competitive and well-functioning markets,
goods cannot be sold at two different prices. Those who
purchased the good at the low price could resell the good in
the high-price market, making a pure profit. But in some
markets, reselling the good is difficult; in others, governments
prohibit or limit resale.
Research and testing account for the major cost of
producing drugs. These are fixed costs that the drug manufacturers
recoup by charging prices that are considerably
in excess of the manufacturing costs. If they can practice
price discrimination, the price they charge in each market
will depend on the price elasticity in that market. But if they
worry about resale, they may charge the same price in
all markets.
Drug companies have developed some effective remedies
against AIDS—not cures but treatments that can
substantially prolong life. They charge $10,000 and more
a year for treatment, a cost few in the developing countries
can afford. The actual cost of manufacturing the
drugs is much, much less. But the drug companies have
been reluctant to sell the drugs at lower prices in these
countries for two reasons. They worried that it would
lower profits in those countries; and, probably more importantly,
they worried about resale, which would lower
profits in their own home markets (the United States,
Europe). But charging high prices in, say, South Africa,
the country with one of the highest incidence of HIV infection
in the world, in effect condemned millions in
that country to a premature death. Naturally, South Africa
balked. It passed a law allowing the importation of drugs
at lower prices, drugs possibly made by manufacturers
that had ignored standard patent protections. The drug
companies sued on the grounds that the law violated their
basic economic rights. But protesters around the world
argued that intellectual property rights must be designed
to balance the rights of potential users and the rights of
producers, that the benefits to the poor in Africa far
outweighed the loss in profits. In April 2001 they successfully
pressured the drug companies to drop their suit against
South Africa.
Protesters in South Africa objected to the high price of AIDS
drugs.
268 ∂ CHAPTER 12 MONOPOLY, MONOPOLISTIC COMPETITION, AND OLIGOPOLY