The Twisted Logic of Drug Re-importation

Jeffrey Tucker points to an interview in which Milton Friedman opposes drug re-importation on the grounds that the whole purpose of a government-granted patent monopoly is to provide an incentive for research investment.

I think Friedman is exactly right, insofar as certain assumptions obtain. As long as we are willing to grant a monopoly to drug companies in the form of patents because we believe this is the best way to achieve the desired goal of sufficient drug research, then it makes sense to do this as efficiently as possible. As Friedman mentions, the high cost of drug production is partly a consequence of FDA certification, which I believe he opposes.

The other issue is price discrimination: the profit-maximizing price for a patent monopoly in the U.S. is not the same as the profit-maximizing price in other countries. Therefore, we have two choices: permit or prevent price discrimination. We could prevent price discrimination by not interfering with re-importation, thus allowing arbitrage, and the prices in both the U.S. and Canada would approach each other. Or, we could allow price discrimination by banning re-importation, and thus preventing arbitrage. Why would we want price discrimination? Because, as Friedman mentions, "price discrimination adds to human welfare, it permits a larger number of people around the world to have the drug than it could otherwise do so." If drug companies had to charge the same price everywhere, there would be people in other countries who could not afford the drug, but could have afforded it under a price discrimination regime. A regime with price discrimination is efficient relative to one without it.

Also, since our purpose in granting the limited monopoly in the first place is to provide an incentive to drug companies, this incentive is best achieved if we allow drug companies to maximize their profits. The sooner we feel that the drug companies have been compensated for their efforts, the sooner we can end the patent. If drug company revenue comes from only U.S. consumers, we are worse off because we could have ended the patent sooner if we had allowed consumers from other countries to share the burden.

However, up until now, we have ignored an important issue - an issue which I must thank Andrew Chaimberlain for bringing to my attention. Drug companies are only able to benefit from price discrimination because taxpayers subsidize enforcement costs. Prohibiting drug re-importation costs money, and we are the ones paying for it.

Our very own Don Lloyd debates this issue of contract enforcment with Stephan Kinsella in the comment thread. Don mentions that price discrimination would be possible, albeit more difficult, even if enforcement costs were not subsidized - a company could simply stipulate in its sales contract that the product may not be resold. Kinsella points out that current law does not allow drug companies to use contracts as a means to prohibit resale, and that this is just, because no one has a right to a monopoly anyway. In other words, since drug companies are already benefiting from patents, we need not grant them favorable contract laws as well.

Kinsella's argument doesn't quite work though. True, in terms of justice, drug companies may not have a right to favorable contract law, since they have already bitten from the forbidden fruit of patents. But who cares about justice? Remember, patents aren't justified by moral arguments in the first place - if they are to be justified at all, it is on pragmatic, efficient grounds. Once we have decided to go down the slippery slope of patents, we might as well try to do so in the most efficient way possible. Of course, this also includes more government intervention.

And this brings me to my final point. Or rather, David Heinrich's final point, as he states so eloquently in the comment thread:

Friedman's also onto something that Mises explained ages ago, namely that one intervention causes problems which lead to another, and so-on and so-forth along the yellow-brick road to socialism.

This is the cost of patents. It doesn't look pretty, but what is the alternative?

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Micha, Good post! I am


Good post!

I am reluctant to believe that Ford is not allowed to write contracts that prevent dealers from setting up resale outlets anywhere they please in competition with other dealers in other locales, states or countries. I am not saying that this is the case, but merely that this would be a possible logical extension of what is being claimed.

Regards, Don

Once it's admitted that

Once it's admitted that patents are a government-granted monopoly, and not a genuine property right, the issue should be clear. The alternative, as in the case of any other kind of so-called "public good" that supposedly wouldn't exist without government holding people up at gunpoint, is to let people produce what they want and spend their own money on what they want, and take the consequences.