4.

Scope and Method Cross-country Study Table 2 Price indices and explanatory variables for the cross country analysis on the pricing behavior in the pharmaceutical world market for the year 1975 Country P GDP/N CV N CV/N PP IPC Malawi 85.99 22.79 2.8 6.74 42.29 1 0 Kenya 71.57 30.51 14 112.37 12.36 1 0 India 44.83 30.51 3732 5067.38 74.16 0 0 Pakistan 54.79 38.28 684 589.61 116.85 0 1 Sri Lanka 21.52 43.26 84 113.26 75.28 1 1 Zambia 136.53 47.91 10 41.76 24.72 1 0 Thailand 67.87 60.47 442 351.25 126.97 0 0 Philippines 72.29 61.4 154 353.05 43.82 1 0 South Korea 49.62 96.28 440 296.06 149.44 0 0 Colombia 67.95 104.19 312 198.75 158.43 0 1 Jamaica 65.21 111.63 42 17.20 247.19 1 0 Brazil 90.23 117.21 2096 899.10 242.7 0 1 Mexico 98.50 161.4 1554 504.66 310.11 0 0 Yugoslavia 68.19 167.91 766 168.82 456.18 0 1 Iran 99.55 175.35 654 274.73 239.33 0 0 Uruguay 93.23 184.19 88 23.3 379.78 0 0 Ireland 104.01 197.67 114 26.7 426.97 1 0 Hungary 80.93 230.7 472 88.53 537.08 0 1 Poland 76.31 233.02 1616 285.48 569.66 0 1 Italy 97.55 250.23 2404 468.46 515.73 0 0 Spain 98.50 260 1802 298.03 608.99 0 0 United Kingdom 100.64 297.21 1992 469.71 426.97 1 1 Japan 115.75 318.14 5716 936.2 614.61 0 0 Austria 197.24 323.72 248 63.08 395.51 0 0 Netherlands 194.08 349.77 308 114.7 270.79 1 0 Belgium 143.81 361.4 698 82.26 853.93 1 0 France 129.43 380.93 5028 442.65 1143.82 1 0 Luxembourg 141.74 381.4 20 3.05 679.78 1 0 Denmark 222.73 383.26 140 42.11 331.46 1 0 Germany, West 215.61 386.05 4858 518.82 942.7 1 0 United States 141.36 465.12 20000 1792.11 1123.6 1 1 Malaysia 100 100 100 100 100 1 0

DPC 0 0 1 1 1 0 0 0 0 0 0 0 0 1 0 0 0 1 1 1 0 1 1 0 0 1 1 1 0 0 0 0

Sources: Chudnovsky (1983), p 189; Kravis et al. (1982), pp 10, 12, 208-209, 212-213, 216-217, 220-221; Metrose (1982), pp 152, 153, 157, 158; OBrien (1979); UNCTAD (1975); UNIDO (1978), pp 10-15, 23. *Two of the 34 ICP countries (Romania and Syria) is left out since data on several explanatory are lacking. PP = 1 (if patents for pharmaceutical are recognized), 0 (if not recognized) IPC = 1 (if government stimulates price competition by means of a centralized purchasing policy or Promotion of the use generics), 0 (if government does not do anything) DPC = 1 (if government applies strict policy), 0 (if not)

As represented in the price index in Table 2, comparative price discrepancies in pharmaceutical will be explained by mans of cross-section study in which several demand and intuitional variables regarded as explanatory variable. The relationship between price level and the explanatory variables are expressed in a linear reduced form equation by using Ordinary Least Square (OLS). The explanatory variables will be chose based on the factors of demand and government policies. These factors are regarded as the determinants of the pricing behavior in drug industry. The variables in the supply side will be eliminated from being considered in the calculation of regression as the data available are extremely aggregated in nature. Hence this will prevent the monopolistic power in the sub market level from being exposed. The explanatory variables that are being used in these calculation of regression are GDP per capita (GDP/N), Volume of consumption (CV), Population (N), Indirect price control (IPC), and Direct price control (DPC).

1. GDP per capita (GDPN) In oligopolistic market of drug industry, the firm will set price at the level what the market will bear. Theres positive relationship between price level of pharmaceuticals (P) and the purchasing power of a country is expected which is where GDPN is serve as a standard in this study. The positive relationship is due to the awareness on price by the consumers with great purchasing power, or because of a doctor which have many customers with great purchasing power This relation is entorced by the fact that the price consciousness of a consumer vvith great purchasing-power. or. for that matter. of a doctor with relatively many patients with great purchasing-power. w11l probably be low: when income rises. the incentive to ransack the market for the cheapest type of a drus needed diminishes and hence demand becomes more price-inelastic. (b) Volrrr,re ofcot~swnprior~ (CV) Total drug consumption is considered as an indication for the size of the actual market of a

specific country. The size of the market is of particular interest when economies of scale can be reaped. Given the extant importance of economies of scale in marketing as well as in research and development to the drug industry and the resultin 1 possibilities to reduce average overhead costs! 1 negative relation between price level (P) and actual size of the market (0) is expected. Attractiveness of a market is not only based on the actual size of the market. but also on potcntiat demand. The number of inhabitants is chosen as a prosy for the number of potential consumers and. consequently, of future sates. Within attractive markets more competition is likely. Hence we expect a negative relation between price level (I) and population (N). (d) Volurw of cotulmptior~ per ccrpittr (CV/N) This quantity indicates the extent to which a market is developed. An increase in quantity demanded by a consumer. generally implies that the composttion of the consumption outlays becomes more differentiated: in general the need for necessities (i.e. essential drugs) tends to be satisfied first before one passes on to the purchase of luxuries (e.g. tranquilizers). which are of more interest to the pharmaceutical industry. Based on the premise that a vvell-developed market attracts more firms and thus shows more competition. a negative relation between price level (P) and average level of consumption (CVIN) is expected.