Working Paper No. 02-18

Inequality and Pharmaceutical Drug Prices: A Theoretical Exercise
Eina Vivian Wong
October 2002

ABSTRACT

Several studies report that in both developed and developing countries, the realtively poor individuals go without medical care, including pharmaceuticals. This situation is associated with both low income and inequality in the distribution of income. Additionally, data show that pharmaceutical prices in developing countries are sometimes higher than those in developed countries for identical products. In this paper, I explore the relationship between per capita income, inequality, and prices. Specifically, I develop a model of demand that shows the equilibrium price of a pharmaceutical drug produced by a monopolist will rise with (1) per capita income and (2) income inequality. In the context of multiple countries, the former result corroborates empirical findings on the statistically significant effect of per capita income on drug prices. The latter result has not been emprically tested. The results from this paper are, however, conducive to nonlinear regression techniques so that income inequality may be tested as a source of variation of drug prices across countries.

DOWNLOAD PAPER