Price and Drug Quality

March 10, 2011

Substandard and counterfeit drugs represent a global public health crisis.  However, there is little economic analysis of the market given the paucity of data.  Focusing on eight drug types on the World Health Organization-approved medicine list, Roger Bate and Aparna Mathur of the American Enterprise Institute, and Ginger Zhe Jin of the University of Maryland constructed an original dataset of 899 drug samples from 17 low- and median-income countries and tested them for visual appearance and disintegration, and analyzed their ingredients by chromatography and spectrometry.

  • Fifteen percent of the samples fail at least one test and can be considered substandard.
  • After controlling for local factors, the authors find failing drugs are priced 13 percent to 18 percent lower than nonfailing drugs but the signaling effect of price is far from complete, especially for noninnovator brands.
  • The look of the pharmacy, as assessed by covert shoppers, is weakly correlated with the results of quality tests.
  • These findings suggest that consumers are likely to suspect low quality from market price, noninnovator brand and the look of the pharmacy, but none of these signals can perfectly identify substandard and counterfeit drugs.

Indeed, many cheaper noninnovator products pass all quality tests, and are genuine generic drugs.  This suggests that policies in favor of these more affordable generic drugs may potentially weaken the signaling effect of price and increase the opportunity for counterfeit entry into the market.  One way to counter this effect is directly providing better information about drug quality.

Source: Roger Bate, Aparna Mathur, and Ginger Zhe Jin, "Does Price Reveal Poor-Quality Drugs? Evidence from 17 Countries," National Bureau of Economic Research, March 2011.

For text:

http://www.nber.org/papers/w16854

 

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