Question

In perfectly competitive and well-functioning markets, goods cannot be sold at two different prices. Those who purchased the good at the low price could resell the good in the high-price market, making a pure profit. But, in some markets, reselling the good is difficult; in others, governments prohibit or limit resale.

Research and testing account for the major cost of producing drugs. These are fixed costs that the drug manufacturers recoup by charging prices that are considerably in excess of the manufacturing costs. If they can practise price discrimination, the price they charge in each market will depend on the price elasticity in that market. But if they worry about resale, they may charge the same price in all markets.
Drug companies have developed some effective remedies against AIDS — not cures but treatments that can substantially prolong life. They charge $10 000 and more a year for treatment, a cost few in the developing countries can afford. The actual cost of manufacturing the drugs is much, much less. However, the drug companies have been reluctant to sell the drugs at lower prices in these countries for two reasons. They worried that it would lower profits in those countries; and, probably more importantly, they worried about resale, which would lower profits in their own home markets (the United States, Europe). But charging high prices in, say, South Africa — the country with one of the highest incidences of HIV infection in the world — in effect condemned millions in that country to a premature death. Naturally, South Africa balked. It passed a law allowing the importation of drugs at lower prices, drugs possibly made by manufacturers that had ignored standard patent protections. The drug companies sued on the grounds that the law violated their basic economic rights. However, protesters around the world argued that intellectual property rights must be designed to balance the rights of potential users and the rights of producers, and that the benefits to the poor in Africa far outweighed the loss in profits.

​​​​​​​Questiom:
In this example, what are the reasons that might lead to price discrimination, and what limits are imposed on the ability of a firm to adopt this practice?

Answer 1

Price discrimination in drug manufacturing is driven by the need to cover high fixed costs and maximize profits according to market demand elasticity. However, the potential for resale and government regulations that permit importing cheaper drugs can restrict this practice.

Step-by-step explanation:

In this example, the reasons that might lead to price discrimination include the ability to maximize profits by charging different prices based on the differing price elasticity of demand in each market. The fixed costs for drug development are high, so manufacturers seek to recoup these costs by setting higher prices, especially where the market can bear it. However, the ability to adopt price discrimination is limited by concerns over resale, which can undermine higher-priced markets, and by government regulations that may allow the importation of cheaper drugs, bypassing patent protections and potentially leading to lower prices through increased competition.