Differential Pricing for Pharmaceuticals: Review of current knowledge, new findings and ideas for action

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Adapting drug prices to the purchasing power of consumers in different geographical or socio-economic segments could potentially be a very effective way to improve access to medicines for people living in low and middle-income countries. A well-implemented differential pricing system could also lead to increase in sales for pharmaceutical manufacturers.

The pharmaceutical industry has been cautious about significantly changing its pricing models, despite the theoretical appeal of differential pricing and its success in improving access to medicines in low- and middle-income countries. This reluctance is caused mainly by concerns that differential pricing could erode profit margins in lucrative high and middle-income markets and high distribution channel markups in low income countries could dilute much of the benefits of differential pricing to poor end-patients.

Recent trends, however, are prompting the pharmaceutical industry to pay more attention to differential pricing, such as economic and demographic growth in some low and middle-income markets, which has increased the potential market size of many low and middle income countries; greater recognition by the pharmaceutical manufacturers and their investors of the social responsibilities; stronger global advocacy for access to medicines, and growing competition from generic manufacturers in emerging markets. Differential pricing allows pharmaceutical companies to signal that their pricing policies are socially responsible and consistent with their obligations to society and not just geared towards maximizing profits. In addition, differential pricing on select drugs opens opportunities to serve low and middle-income markets and creates economies of scope for pharmaceutical companies.

A review of the existing literature on differential pricing and analysis of successful and unsuccessful examples of such pricing reveal that it may lead to overall welfare benefits only when the overall sales increase as a result. The analysis also suggests that social welfare is enhanced when differential pricing opens new markets for pharmaceutical companies in countries where the affordability for the drug is significantly lower than the prevailing price in existing markets. Whether the benefits of differential pricing accrue more to the pharmaceutical company or to the patient/payer depends on the elasticity of demand and the market structure.
It is important to note that differential pricing is not a panacea to ensuring access. For patients with affordability levels lower than the marginal cost of manufacturing, donor subsidies and government support will continue to be required.