Pharmaceutical Pricing and R&D as a Global Public Good

This paper examines the international variation in the prices of branded pharmaceuticals. We consider short-run profits, or quasi-rents, as representing each country's contribution toward the global public good of therapeutic information embodied in new pharmaceuticals. We characterize globally optimal contributions through the Samuelson-Lindahl criteria and contrast the resulting outcomes with the Nash noncooperative equilibrium as developed in the Olson-Zeckhauser theory of international alliances. That theory predicts both the undersupply of public goods and the "exploitation" of large countries by small ones. We calculate national contributions to the global public good with data from a recent RAND report. Other countries' contributions resulting from their prices are much lower than those in the United States, but their free riding is not complete. We also find that country size is a powerful determinant of contributions and that larger countries contribute disproportionately more. Finally, we suggest a cooperative policy approach that would move us closer to optimality with health benefits for all countries.