Academic journal article AEI Paper & Studies

The Market for Inferior Medicines: Comparing the Price of Falsified and Substandard Products with the Legitimate Medicines in Emerging Markets

Academic journal article AEI Paper & Studies

The Market for Inferior Medicines: Comparing the Price of Falsified and Substandard Products with the Legitimate Medicines in Emerging Markets

Article excerpt


The trade in inferior quality medicines kills innocent patients. In some countries' markets, half of the key antimalarial medicines contain no active ingredient. (1) Perhaps 15% of the global drug supply outside of advanced countries is counterfeit, rising in certain markets in parts of Africa and Asia to over 50%. (2) But counterfeits are not the only low-quality drugs on the market. Substandard drugs, which are legally but poorly produced, also kill and can contribute to the development of drug-resistant strains of some diseases.

One of the reasons fake drugs proliferate is that real medicines are expensive for people in emerging countries. In some places it may take three months' wages to purchase an innovator treatment of expensive antibiotics; even the generic treatment could cost roughly two weeks' wages. (3)

Poor-quality drugs are on average sold at cheaper prices than their high-quality counterparts, but the price signal is far from complete. While the literature on the topic is limited, partly due to the lack of data on poor quality medicines, available data suggests that even expensive drugs are not guaranteed to be high quality. (4)

The price within each market will be determined by a raft of factors, including:

1. Price control regulation, price ceilings, mandatory retail price, and price guidance (5)

2. Import tariff, sales taxes and other duties (6)

3. The penalties for counterfeiting and breaching quality regulations (7)

4. Whether most drugs are registered (8)

5. The literacy rate (9)

6. Income (10)

Additionally, the local regulatory environment and business conditions will affect the prices of legitimate drugs. There are no tariffs, and often no taxes, on locally-produced drugs in order to give local producers an advantage as they compete with more efficient international manufacturers. Some countries, such as Ethiopia, also charge higher registration fees for imports (levied on both generic and innovator drugs) than for locally made drugs. (11)

Distribution chains vary; some are short while others are convoluted and include many intermediaries. Generics often have higher-percentage markups (although usually smaller absolute amounts), because their manufacturing costs are lower.

All these factors will affect whether counterfeits or substandard products are prevalent in a particular market. This paper builds on earlier research, examining original data collected from 899 drug samples across 17 developing and mid-income countries to explore the price signal associated with inferior medicines.

Note that all the drugs were purchased without a prescription. In no case did the lack of a prescription prevent a drug sale. It is not clear whether there are local laws requiring pharmacists to only sell drugs if a prescription is available in the sampled countries and cities. If there are such laws, they were not followed by pharmacies or enforced by regulators.

Most of the above myriad factors are external to each market. By comparing legitimate and inferior products from within the same market, it is possible to control for these external factors and concentrate the analysis on price differences associated with a product's legality and quality.

Drug Supply and Distribution Cost Structures: Legitimate, Falsified and Substandard--theoretical explanations of pricing difference

In order to understand how a trader of falsified or substandard products may price his wares, it is instructive to first outline the main costs and markups for the players in the legitimate market.

The average proportions of costs of the final retail price of pharmaceuticals are varied across countries. Levison and Laing 2003 (12) measure mark ups along the supply and distribution chain for a variety of poor and mid-income countries. Such charges include import tariffs, port charges, freight charges, inspection and other regulatory fees, importer fees, taxes, wholesaler and retailer markups. …

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