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A U.S. Army medical researcher takes part in World Malaria Day in Kisumu, Kenya on Apr. 25, 2010.
The trade in inferior quality medicines kills innocent patients. In some countries’ markets, half of the key antimalarial medicines contain no active ingredient.  Perhaps 15% of the global drug supply outside of advanced countries is
counterfeit, rising in certain markets in parts of Africa and Asia to over 50%.  “In some places it may take three months’ wages to purchase an innovator treatment of expensive antibiotics; even the generic treatment could cost roughly two weeks’ wages.” –Roger BateBut counterfeits are not the only low-quality drugs on the market. Substandard drugs, which are legally but poorly produced, also kill and can contribute to the development of drug-resistant strains of some diseases.
One of the reasons fake drugs proliferate is that real medicines are expensive for people in emerging countries. In some places it may take three months’ wages to purchase an innovator treatment of expensive antibiotics; even the generic treatment could cost roughly two weeks’ wages. 
Poor-quality drugs are on average sold at cheaper prices than their high-quality counterparts, but the price signal is far from complete. While the literature on the topic is limited, partly due to the lack of data on poor quality medicines, available data suggests that even expensive drugs are not guaranteed to be high quality. 
The price within each market will be determined by a raft of factors, including:
Additionally, the local regulatory environment and business conditions will affect the prices of legitimate drugs. There are no tariffs, and often no taxes, on locally-produced drugs in order to give local producers an advantage as they compete with more efficient international manufacturers. Some countries, such as Ethiopia, also charge higher registration fees for imports (levied on both generic and innovator drugs) than for locally made drugs. 
Distribution chains vary; some are short while others are convoluted and include many intermediaries. Generics often have higher-percentage markups (although usually smaller absolute amounts), because their manufacturing costs are lower.
All these factors will affect whether counterfeits or substandard products are prevalent in a particular market. This paper builds on earlier research, examining original data collected from 899 drug samples across 17 developing and mid-income countries to explore the price signal associated with inferior medicines.
Note that all the drugs were purchased without a prescription. In no case did the lack of a prescription prevent a drug sale. It is not clear whether there are local laws requiring pharmacists to only sell drugs if a prescription is available in the sampled countries and cities. If there are such laws, they were not followed by pharmacies or enforced by regulators.
Most of the above myriad factors are external to each market. By comparing legitimate and inferior products from within the same market, it is possible to control for these external factors and concentrate the analysis on price differences associated with a product’s legality and quality.
Roger Bate is the Legatum Fellow in Global Prosperity at AEI.
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3. “Medicine Prices, Availability, Affordability & Price Components,” Health Action International, http://www.haiweb.org/medicineprices/.
4. Roger Bate, Aparna Mathur, and Ginger Zhe Jin. “Does Price Reveal Poor-Quality Drugs? Evidence from 17 Countries,” Journal of Health Economics, August 18, 2011, page 5.
5. Atella, Vincenzo; Jay Bhattacharya and Lorenzo Carbonari. “Pharmaceutical Industry, Drug Quality and Regulation: Evidence from US and Italy” NBER working paper #14567, 2008.
6. Bate, Roger, Richard Tren, and Jasson Urbach. “Still Taxed to Death: An Analysis of Taxes and Tariffs on Medicines, Vaccines and Medical Devices.” Washington, DC: AEI-Brookings Joint Center for Regulatory Studies, 2006.
7. Roger Bate, Aparna Mathur, and Ginger Zhe Jin. “Does Price Reveal Poor-Quality Drugs? Evidence from 17 Countries,” Journal of Health Economics, August 18, 2011, page 18.
8. Oxfam, “Eye on the Ball Medicine regulation – not IP enforcement – can best deliver quality medicines” 143 Oxfam Brief Paper, February 2, 2011.
9. Roger Bate, Aparna Mathur, and Ginger Zhe Jin. “Does Price Reveal Poor-Quality Drugs? Evidence from 17 Countries,” Journal of Health Economics, August 18, 2011, page 10.
10. “Medicines: spurious/falsely-labelled/ falsified/counterfeit (SFFC) medicines,” World Health Organization, last modified January 2010, http://www.who.int/mediacentre/factsheets/fs275/en/.
11. “Survey on the Prices of Medicines in Ethiopia,” World Health Organization and Federal Democratic Republic of Ethiopia Ministry of Health, http://apps.who.int/medicinedocs/documents/s16554e/s16554e.pdf.
The trade in inferior quality medicines kills innocent patients. Perhaps 15 percent of the global drug supply outside of advanced countries is counterfeit, rising in certain markets in parts of Africa and Asia to over 50 percent. But counterfeits are not the only low-quality drugs on the market.
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