Customers left with no choice
View(s):The matters got worse recently due to a series of shocking news about not only the prices and quality of medicines, but also the multi-million corrupt deals in the Sri Lankan pharmaceutical industry. In addition, the price of medicines in the country have doubled or trebled after the country’s economic crisis.
File picture of pills.
The crisis impact on the health sector, as the survey findings of the Department of Census and Statistics in 2023 reported, is also dreadful. While about 29 per cent of the respondents were suffering from some kind of sickness, 7 per cent have attempted to alter medication due to the problem of affordability. These alterations include changing the place or the doctor, delaying treatments, reducing the prescribed doses and stretching the frequency of taking medicines.
Competitive market
I am going to deal with this as an economic issue, not a health one. Recently, as I happened to moderate a panel discussion on “Regulating the Pharmaceutical Market” at the University of Colombo, I thought that the economic problem of the pharmaceutical industry is timely in the current context of Sri Lanka.
The issue that I am touching upon today is about the role of the market and the government: Some would believe in “market versus government” as substitutes for each other. In contrast, some would believe in “market and the government” as these two are complementary institutions.
As per the neoclassical idea, a competitive market maximises the interests of both parties involved in exchange in a market – suppliers (sellers) and the customers (buyers). If the market is competitive, none of the parties can get an undue advantage from the other party. In the neoliberal premises, the same ideas were scaled-up to a macro level, guiding economic policies.
How does a competitive market guarantee that the interests of both the supplier and the customer are maximised? And how does it guarantee that neither supplier nor customer has an opportunity to take undue advantage from the transaction? It is because of the “assumptions” that the neoclassical economists maintained in theorising their ideas.
Assumptions
According to one of the critical assumptions, a market for a good or a service must be competitive. In order to make the market competitive, according to the assumptions, there are “many and informed” suppliers and customers.
If there are only “few suppliers” in the market, they have an undue advantage to exploit the customers, whose choices are limited. When domestic producers receive excessive protection from imports, apparently the market is controlled by a few producers exploiting the consumers.
Accordingly, even the government can create a business environment to give an undue advantage to a few selected producers or suppliers. Many local businesses in Sri Lanka had this undue advantage in the aftermath of the economic crisis because of import controls.
The government itself can run some of the businesses limiting competition and enjoying undue advantage from the people directly or from the economy indirectly. The electricity tariffs in the country were raised after the crisis to establish “cost-reflective energy prices”. The electricity market has no competition. Accordingly, electricity consumers had to pay higher tariffs even to cover the internal inefficiencies of electricity sector which has no competition.
Know what you buy
Under the above assumption, I have mentioned not only “many” but also “informed” buyers and sellers. In particular, the customers should know what they buy. In most of the cases, customers go by the available information about a particular product so that the producers too are careful about maintaining consumer confidence.
Given the presence of “many suppliers” in a market with “informed customers”, the demand is price-sensitive and quality-sensitive. Any increase in the price of a competitive product would divert the customers away from that to another product. Similarly, inferior quality would send the customers away. If the customer is not visiting for the second-time, it is a good performance indicator of the business.
The suppliers in a competitive market do not have the ability to determine their own product prices arbitrarily or to thrive or at least to survive by selling goods with inferior quality. Competition limits the suppliers’ ability to take an undue advantage by charging high prices from the customers for sub-standard products.
Are these assumptions realistic? Absolutely not. However, the markets that are fairly open to the world and less-controlled by the government or any other party consist of “many-informed” suppliers and customers, while the market demand is highly sensitive to changes in price and quality.
Market for pharmaceuticals
Among the various markets for goods and services, there are a variety of reasons for the pharmaceutical market to remain less competitive. Firstly, the customers who are the patients or their representatives hardly know the product they buy. In many cases, neither do they have the skill to read the doctors’ prescription; even if they can read the prescription and instructions, they do not have knowledge on the efficacy and side effects of medicines.
After all, the patients must buy it even if they do not have any knowledge on what they buy because it is a treatment for a sickness. This means that demand for medicines is hardly price-sensitive. This inelastic demand means that the customers doesn’t need to buy more when the price is low; neither do they want to buy less when the price is high.
On the supply-side too, the medicines are developed by big multinationals which spend colossal amount of resources, time period and expertise knowledge on R&D activities. New drugs often receive patent rights for a maximum 20 years. A well-known criticism is that by modifying the drug molecule, new patent rights can be obtained extending the monopoly power of the pharmaceutical companies.
In the value chain of the medicine market, another criticism is about the over-invoiced CIF value on imports. This practice enables the capture of undue price advantage through the underhand deals between the suppliers and importers.
Market not working
The pharmaceutical market often faces significant challenges that hinder its functionality, adversely affecting customers. Unlike many other markets, the social and humanitarian implications of a poorly functioning pharmaceutical market are profound. This is primarily because public health—a critical area where governments play a major role—is directly at stake.
To address these challenges, pharmaceutical markets worldwide are subject to stringent regulations. However, the effectiveness of such regulations largely depends on the capacity of government agencies.
A competent regulatory authority must possess the following key attributes: (a) the network of information from around the world, (b) professional expertise and technical skills to process such information, (c) R&D capabilities to undertake pharmaceutical market-related research, (d) information and communication technology (ICT) to support data processing and (e) standard modes of disseminating market information to both the suppliers and the customers.
When equipped with these capabilities, a robust regulatory authority can mitigate the limitations inherent in the pharmaceutical market as outlined by neoclassical economic assumptions. In doing so, government intervention serves as a complementary force, enhancing market functionality.
Alternatively, governments may choose to go beyond a complementary role and undertake activities that substitute market functions altogether. However, determining whether the government is superior to the market mechanism requires an in-depth analysis—a discussion that lies beyond the current scope.
(The writer is Emeritus Professor at the University of Colombo and Executive Director of the Centre for Poverty Analysis (CEPA) and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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