(Varian) A daily dose of the AIDS drug PLC sells for $18 in the United States and $9 in Uganda (New York Times, September 21, 2000). Even at $9 a dose the drug company makes a profit on additional sales. But if the drug were sold at $9 to everyone, profits would decline. Price discrimination is not popular with consumers, especially those paying the higher price. To evaluate whether differential pricing is good or bad, the critical question from the viewpoint of economics is whether uniform price or differential pricing leads to more people getting the drug. In general, there is no easy answer. Imagine that there are only two countries involved, the United States and Uganda:
a. Imagine the US market for the PLC drug is more than five times the Ugandan market, and the drug sells respectively for $18 and $9. What price is likely to prevail if only one price can be charged? What would be the effect on total consumption and, especially, for drug consumers in Uganda? What would be the effect on US drug consumers?
b. Imagine an anti-malarial drug that many people in Uganda would buy at $2 a dose and few people in the United States would buy at $10. If the Ugandan market is more than ten times the US market, what price is likely to prevail if drug company can set only one price? What would be the effect on total consumption and for drug consumers in United States and Uganda?
c. Based on this example, discuss when price discrimination is likely to be socially useful and when it does not have much to recommend it.