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Does Price Reveal Poor-Quality Drugs? Evidence from 17 Countries

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  • Roger Bate
  • Ginger Zhe Jin
  • Aparna Mathur

Abstract

Focusing on 8 drug types on the WHO-approved medicine list, we constructed an original dataset of 899 drug samples from 17 low- and median-income countries and tested them for visual appearance, 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, we find that failing drugs are priced 13.6-18.7% lower than non-failing drugs but the signaling effect of price is far from complete, especially for non-innovator brands. The look of the pharmacy, as assessed by our 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, non-innovator brand and the look of the pharmacy, but none of these signals can perfectly identify substandard and counterfeit drugs. Indeed, many cheaper non-innovator products pass all quality tests, and are genuine generic drugs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16854.

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Date of creation: Mar 2011
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Publication status: Published in the Journal of Health Economics 30 (2011) 1150-1163
Handle: RePEc:nbr:nberwo:16854

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  1. Gene M. Grossman & Carl Shapiro, 1986. "Foreign Counterfeiting of Status Goods," NBER Working Papers 1915, National Bureau of Economic Research, Inc.
  2. Richard G. Frank & David S. Salkever, 1995. "Generic Entry and the Pricing of Pharmaceuticals," NBER Working Papers 5306, National Bureau of Economic Research, Inc.
  3. Carl Shapiro, 1982. "Consumer Information, Product Quality, and Seller Reputation," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 20-35, Spring.
  4. Yi Qian, 2008. "Impacts of Entry by Counterfeiters," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1577-1609, November.
  5. Grossman, Gene, 1986. "Counterfeit Product Trade," CEPR Discussion Papers 103, C.E.P.R. Discussion Papers.
  6. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(2), pages 197-207, April.
  7. Danzon, Patricia M. & Chao, Li-Wei, 2000. "Cross-national price differences for pharmaceuticals: how large, and why?," Journal of Health Economics, Elsevier, vol. 19(2), pages 159-195, March.
  8. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 213.
  9. Lanjouw, Jean O. & Cockburn, Iain M., 2001. "New Pills for Poor People? Empirical Evidence after GATT," World Development, Elsevier, vol. 29(2), pages 265-289, February.
  10. Ginger Zhe Jin & Andrew Kato, 2006. "Price, quality, and reputation: evidence from an online field experiment," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 983-1005, December.
  11. Anis, Aslam H. & Wen, Quan, 1998. "Price regulation of pharmaceuticals in Canada," Journal of Health Economics, Elsevier, vol. 17(1), pages 21-38, January.
  12. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 615-41, August.
  13. Danzon, Patricia M & Chao, Li-Wei, 2000. "Does Regulation Drive out Competition in Pharmaceutical Markets?," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 311-57, October.
  14. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(4), pages 647-58, October.
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Cited by:
  1. Daniel Bennett & Wesley Yin, 2014. "The Market for High-Quality Medicine," NBER Working Papers 20091, National Bureau of Economic Research, Inc.
  2. Roger Bate & Ginger Zhe Jin & Aparna Mathur & Amir Attaran, 2014. "Poor Quality Drugs and Global Trade: A Pilot Study," NBER Working Papers 20469, National Bureau of Economic Research, Inc.
  3. Roger Bate & Ginger Zhe Jin & Aparna Mathur, 2012. "Counterfeit or Substandard? Assessing Price and Non-Price Signals of Drug Quality," NBER Working Papers 18073, National Bureau of Economic Research, Inc.
  4. Roger Bate & Ginger Zhe Jin & Aparna Mathur, 2012. "In Whom We Trust: The Role of Certification Agencies in Online Drug Markets," NBER Working Papers 17955, National Bureau of Economic Research, Inc.

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