Why Drug Reimportation Can't Work

Drug reimportation is a hot idea these days. It doesn't work. Here's why.

Say you are a textbook publisher. You have a line of college textbooks that you produce. This is a complex and expensive process; you hire high-level scientists and academics to write the books, editors to fix their dreadful writing, fact-checkers to make sure it doesn't say "e=mc3", artists to create the thousands of diagrams and charts and pictures. You pay for printing and warehousing and distributing. You pay IT companies big bucks to maintain your catalog and run your online order system. In short, every textbook represents quite a large investment of resources on your part.

You sell these books for $65 apiece to university bookstores across America. You make decent money; some years you lose a little, most years you make a nice profit. All is well.

Then one day you get a call from a university in Australia. They've heard about your line of textbooks, which it turns out are better than the textbooks that they can print in Australia. The university wants to buy books from you. Hooray, you think. Now, the problem arises that the Aussies don't have as much money sloshing around their public university system as we do. There's no way, in fact, that they can afford to spend $65 per book. They can give you $30 per book, no more than that. You talk things over with your accounting folks, and they tell you: good news. It turns out that the marginal cost of producing another textbook and shipping it to Australia is $27.50. Selling books to Australia won't make you a fortune, but it will improve your bottom line somewhat without hurting your core business. Everybody wins, and so the freighters loaded with copies of "Sociology And You" start steaming for Perth.

Until one day you come into your office and on your computer screen there appears a web ad offering copies of "Sociology And You" for $45. You click on the ad, and it's a company in Australia that is buying the books from you wholesale, and then reselling them to American college students over the Internet retail.

Is this a problem? Well, it's not much of a problem if these folks are moving 10 books a week. It's a huge problem if they're selling 10,000 copies a day. As you're preparing to address this problem, you turn on the TV and hear presidential candidates saying that the high cost of textbooks in America is an outrage, and that what we need to do is reimport these books from Australia, where they're cheap.

But they're only cheap in Australia because you are selling them to Australia as a marginal, peripheral business. The main market for your product is the one subsidizing all the fixed costs of book production; those Aussie dollars are just a little bit of icing on the cake.

So what happens if the government follows through on its promise of cheap textbooks for everyone? Well, they pass a law making it legal and easy to reimport these books directly without tiresome Internet runarounds. Eager wholesalers line up to make a fortune on this book bonanza...only to discover that there aren't any books available from Australia. Why are there no books available from Australia?

Because you, not being a complete idiot, have stopped selling Australia textbooks for $30 apiece. Every book you sold to Australia would end up costing you a sale here in the US, and the US sales are where you make your margin. Since the Australian sales are jettisonable from the point of view of your core business, you jettison them to save what's important, the U.S. market.

Drug reimportation works the same way. The issues about safety and provenance are purely side issues. The core of the problem is an economic question: what does it cost to get this particular product? It may be that the price is different in one place than another. Price differentials do create a potential for arbitrage, but they don't create a reality that the lower price is somehow the right price, or that everyone can get the lower price. Attempts by government to get the lower price for everyone will simply end up removing the lower price option for the people who had it before.

All drug reimportation laws can do is hurt the availability of American pharmaceuticals in other countries. You won't sell textbooks to Australia when those textbooks are destroying your profit center in America; Pfizer isn't going to sell drugs to Canada if the Canadian drugs are going to destroy their profits here. It's as simple as that.

(This "classic" post is brought to you courtesy of my old archives and lack of time.)