What's Fair About Price Discrimination in Pharmaceutical Markets

underground economistA while back, DVD companies hoping to sell their products in countries like Poland faced a dilemma.  They could sell their products at a nice profit in the booming U.S. market, but to sell products in those other countries, they had to lower their prices.  Such variable pricing is a common business practice.  All kinds of services are less expensive in Poland than in the United States.  An hour with a psychotherapist or personal trainer, for instance, is significantly cheaper in Warsaw than in New York City.  But small, non-perishable products like DVDs create big problems for manufacturers.  If the going price of such a product is significantly lower in Poland than the U.S., savvy business people will purchase large numbers of DVDs in Poland and ship them back to the United States to sell them for a hefty profit.  They can’t do the same with personal trainers or psychotherapists, to the chagrin, no doubt, of some people in those professions.

So DVD manufacturers came up with a clever idea.  As Tim Harford describes in his book The Undercover Economist: “The DVD industry agreed on a system of regional coding so that DVDs bought in the U.S. would not work in Europe,” and vice versa.

When some people found out about this arrangement, they were creeped out.  It seemed like the companies were up to their slimy old tricks.  How dare they doctor a DVD so that an honest consumer can’t play it on his or her DVD machine?  It felt like the DVD manufacturers were getting greedy.  If they were willing to sell DVDs at that price in Poland, after all, then clearly such lower prices must still be profitable.  Why wouldn’t they sell DVDs at that same price in the United States? …(Read  more and view comments at Forbes)

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