Book Reimportation?

By Ian

One of these days, I'll get back to some original ideas. Right now, work and life demands mean that I'm operating largely on the "reactive" side of things (yes, that's a quick dig at Scientology, something I both loathe and can't seem to read enough about).

That said, take a quick look at this post from the appropriately lauded Marginal Revolution:

The economic problem is simple: professors assign a book without worrying much about the cost that students will pay. In fact a pricey book might be a nice way to drive down your enrollment and lower your workload.

I've recently started another class in the evenings that requires a hefty textbook. (The subject is almost embarrasing to mention; suffice it to say I should have had it years ago, have essentially taught it to myself, yet need the paper documentation for future advancement.) As I learned to do WAY back in grad school (that is, a couple of months ago), I went to Amazon and looked to see if they had a copy.

Of course, they did. But what they also have is a "New and Used" section from affiliated booksellers. Usually among the first results you receive after having become enticed by the lower price for a NEW! book and clicking the link is somene selling the "International Edition" of the book you might be interested in.

Here's an example. Compare this price with the price on the second listing for Gujarati's Basic Econometrics. (Yes, I'm hawking a book I was a huge fan of. No, that's not the subject I was referring to.)

The price difference is considerable. What's off about the International Version? It's paperback, and the regular cover design is usually shrunk down so that the words INTERNATIONAL VERSION can be printed on the front. Oh, and big text on the back declaring that selling the book in the US or Canada is illegal. Other than that, nothing.

It wasn't until I tought about Cowen's post, however, until I realized that I was being a hypocrite.

I'm thoroughly against the idea of drug reimportation; something I plan to expound on further when I get the chance. Suffice it to say I think the effects would be disastrous to the single best drug research and production facility in the world: the US. And yet, here I am blatantly reimporting books. The rest of the world clearly faces a lower price for these things -- largely because of a lower demand driven by fewer higher-education facilities I would assume -- and I freely take advantage of that by buying it for less than the domestic price and slightly higher than the international one.

Now, I suppose I could make an argument that the price of the books is far more removed from the support of research and teaching that keeps good authors working at universities than is the price of drugs from the labs that find new ones or cheaper and better ways to produce existing ones. I might also suggest that international subsidies for textbooks are a bit less than those for health care and medicines, which places the issue a bit more into the realm of "price discrimination" than drug purchasing in Canada. In fact, the general system of book development strikes me as less distorted by bad incentives, taxes, subsidization, and (perhaps most importantly), slow testing and verification than is the case for drugs.

But really, were I to be ideologically consistent, book reimportation is essentially the same as drug reimportation. Of course, foolish adherence to ideology might not be the best idea, either.

-- September 23, 2004 9:50 AM |

Comments

larry wrote:

I look forward to your arguments against drug re-importation. Your fact based positions are always interesting and generally persuasive.

However, I do not find the traditional arguments about protecting the domestic market against the lower prices charged in, say Canada, compelling.

I am a conservative and a top officer in an energy company and I think high profits are great, but not if those profits are boosted by
artificial barriers to free trade.

If you look at Pfizer's income statement for the year 2002 (2003 contained some non recurring items, and is not as typical), Pfizer had the following results: (everything in billions)

Sales: 32.4
Cost of Sales: 4.0 (The production costs are cheap!)
R&D: 5.2
Selling and Admin costs: 10.8
Taxes: 2.6
Other: .7
Net Income: 9.2

This is a very highly profitable company with an after tax margin of 35% even after a high level of R&D. I suspect that their selling and admin costs are very fat, since these type of costs can grow with high profitability. Profits exceed R&D by almost 2:1.

It is difficult to argue that profits have to be at this level to fund R&D. Moreover, you can look at Pfizer like a major oil company. If there isn't R&D or wells drilled then the company is liquidating since both highly profitable drugs and oilfields have a finite life whether it is due to expiring patents or deplition of resources.

Obviously Pfizer can sell drugs for just slightly more than the marginal selling and manfacturing costs and add to their bottom line. However, if we allowed reimportation, then Pfizer would either have to not sell to Canada or they would have to lower the US price to the point that the inconvience of bringing in cheaper Canadian drugs would not be worth the savings. I believe that instead of selling a drug for $100 in the US and $20 in Canada, a more likely pricing scenario would be $80 in the US and $60 in Canada. Canada now bears a larger portion of the fixed costs of running a drug company, including the R&D, and the US receives a lower price. If Canada chooses not to allow such an increase then the Canadians will go without the drug and if it is truly life saving then Canadians will reimport the drug from the US, which will bear some portion of the fixed costs.

I think the safety issues could be dealt with, and I just don't see the problem with this approach.

Mexico and 3rd world markets that cannot afford near US price levels would be a different problem, but I suspect there is an intermediate type of step which could also shift some US fixed costs to these countries while not over pricing the drugs or destroying profits within the US.


-- September 25, 2004 1:55 AM ∞

Don Lloyd wrote:

Ian,

The difference between the reimportation of drugs and textbooks is that Congress is unlikely to pass a law which makes it illegal for publishers to cut off supply to foreign distributors if they violate their contracts and allow economically significant reimportation back into the US.

When Congress finally passes a law allowing the reimportation of drugs, it is nearly certain to contain a prohibition against drug suppliers restricting foreign sales into channels that might be used for reimportation. Without this prohibition, the whole exercise is an ineffective and futile attempt to invalidate economic law. With the prohibition, the sense in which the drug companies have not been nationalized is even more limited.

To the extent that isolated markets and price discrimination are feasible, everyone is better off than in the case in which no exports exist at all to protect domestic pricing.

Regards, Don

-- September 25, 2004 12:17 PM ∞

Ian wrote:

Thanks for the thoughts, especially on the book thing, Don.

I did mean this post a little more tongue-in-cheek than it might have sounded. The issue of reimporting books is, well, not too terribly worrysome for the majority of the world. It was just something I realized when I saw the post at MR.

That said, however, it did make me think about the differences between the two markets in terms of trade and the benefits of free trade. Int'l trade arguments don't much rest on the qualitative nature of the good, save for it being labor- or capital-intensive (or a good/service argument, though that is more fine grained than I wanted to be here), so the question is begged about drugs vs. some less politically sensitive item. It would seem all well and good to let people bring books back in if they can find them cheaper elsewhere. This still, however, raises the same questions about the validity of reimporting drugs. If we should all just be in one big happy market, what's so bad about letting people find drugs for a cheaper price? And thus the key differences about books arise; the R&D, production costs and facilities, and incentives to break patents.

There are very few people whose lives can be shown to be demonstrably worse off if they can't afford a certain book. Not so with drugs.

But, as I hope to get around to making more clear later, this is a place where I think the interests of intellectual property rights has to hold sway. And which brings me, very briefly, to Larry's comments.

Safety issues are a red herring. It's an argument that politicians grabbed a hold of because it's easier to get someone riled up about safety issues than it is property rights. I tend to dismiss all arguments about drug safety as largely irrelevent and probably politically motivated.

Canada sets drug price ceilings. Unless you can get a country that is having its own struggle with a failing health care system to agree, en masse, that it will pay higher prices for drugs across the board, there is not ability for Pfizer to discriminate on price for Canada. It gets told what it will receive for the drugs, essentially.

The other side of the spectrum is that Pfizer refuses to sell to Canada. At which point a couple of things can happen: Canada can either break the patent and start producing the drugs itself, or can buy from someone else in the world that has done the same thing. Knowing this is a real possibility (since it is a growing reality), Pfizer can either choose selling to Canada for barely above cost (if at all), or not at all. If you're sitting in the President's seat at Pfizer, which looks like the better deal?

My main objection to your comments, however, is the idea that there is a level at which profit "should be". Unless you're willing to regulate everything else within and without of Pfizer's market, any attempt to impose a ceiling on the profits Pfizer makes (which is effectively the same thing as saying they MUST charge a lower price) will have the same effect as reimportation: internal functions at Pfizer slow down so that they can increase the amount of revenue per venture.

"Profits exceeding R&D" is a sort of end-run around the main issue. Within the range of profit here are the reinvestments that Pfizer makes in the company, including R&D and advertising, buying new payroll systems if it so chooses, upgrading office facilities, or whatever else they choose to do with it (this being the point of the distinction between accounting and economic profit). Keeping profit to just slightly above the needs of R&D means that, in a quarter or two, R&D will drop precipitously since the other things the company needs to do will cut into the R&D budget.

And, just to address the point for a minute: lots of people talk about how much more drug companies spend on advertising than on R&D. See! they say, it's not all going to making new drugs! Well, no s*&t sherlock. There's a good reason for that. The price of 30 seconds of good TV real estate, or a couple full page ads in a glossy magazine all, is pretty damn high compared to the cost of a lab tech for the same 30 seconds or 1 week shelf-life of the ad. It takes a lot more money to see decent returns from advertising than it does with the lab technician. That dollars spent on ads are higher, in absolute terms, than dollars spent on R&D says nothing about the value of the investment. But here's the thing: no one's asking doctors about new drugs because a lab tech at Pfizer went to a bar and told people about a new cholesterol pill. The advertising is working, and it in turn funds that R&D that the entire WORLD relies on for new drugs.

If you strike at the profit-making ability of a drug company, there is no way to get around the fact that you're taking a lump out of R&D.

To me, the question is: just how comfortable are you that we have all the drugs we need for a while? Because if the reimportation goes forward, it could be a good long while until we see anything new...

-- September 26, 2004 11:32 AM ∞

Larry wrote:

Ian,

I agree that safety is a red herring, but of course it is a false argument that Pfizer (I am using this one company to stand in for the entire drug industry) is all too willing to use.

But I don't think it really matters what type of health system Canada has, it is a central payer system which has negotiated a much lower price for certain drugs than individual buyers get in the US. What if Pfizer decided to market their drugs at substantially different prices within the US depending upon income of the buyer? This system would breakdown since someone would arbitrage the differences. Why should the laws protect Pfizer so that they can get away with this market manipulation?

To some extent I believe that the R&D argument fails to hold water. There is an assumption here that Pfizer can choose between profits and R&D, and that if profits fall the optimizied results would be to lower R&D so that profits would be maintained. Again, in the absence of R&D, Pfizer will run out of substantial profits as they gradually become a manufacturer of generic drugs. R&D is in their own interest. There are plenty of industries that make substantial R&D efforts even with lower profits. My original example was to compare this with exploration efforts by oil companies. Failure to spend means that existing production cannot be maintained.

I have no desire to determine the ideal profitability level. I didn't initially bring up profits, except to demonstrate that the level earned is, for Pfizer, at a so high a level that the counter argument that R&D is threatened with any decline should atleast be examined.

At the end of the day, drug reimportation restrictions allow Pfizer to manipulate the world wide market to the advantage of the single payer systems and themselves, and to the disadvantage of US consumers. R&D efforts are, in effect, paid for by US consumers to the benefit of the world.

This could be fixed by removing re-importation barriers. It is odd to see a free market economist arguing in support of such barriers.

-- October 1, 2004 3:12 PM ∞

soittoäänet wrote:

nice!

-- January 13, 2009 2:21 AM ∞

Post a comment