A study to test if the pharmaceutical industry practiced international price dis
ID: 3207474 • Letter: A
Question
A study to test if the pharmaceutical industry practiced international price discrimination estimated the following model for a cross section of 32 countries (standard errors in brackets). where Pi=The phar. Price level in the ith country divided by that of U S GDPNi-per capita domestic GDP divided by that of U S CVNi=per capita consumption of drugs in i divided by that of U S PPi=an indicator variable equal to 1 if phar. patents are recognized in i, zero otherwise. PPCi= an indicator variable equal to 1 if i applies strict price controls, zero otherwise. IPCi= an indicator variable equal to 1 if i encourages price competition, zero otherwise. a. Taking into account the sign and direction of all the explanatory variables, does the study suggest international price discrimination? Why or why not?Explanation / Answer
a. Consideting the sign of explanatory variables:
GDPNi has positive sign which implies the price increases with GDP
per capita consumption has negative coeffieicnt which implies negative correlation with price and which is apt
PPi has positve correaltion, this is also apt since the patent recognition increases the price
PPCi has positive correlation and should have a positive coeefieint and IPCi should have negative coeffieicnt
The sign and directaion of the all explanatory variables are apt and hence they can do a price discrimination for different values of explanaroty variables
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