Frederick Schut and Peter VanBergeijk16 published an article in which they attempted to see if the pharmaceutical industry practiced international price discrimination by estimating a model of the prices of pharmaceuticals in a cross section of 32 countries. The authors felt that if price discrimination existed, then the coefficient of per capita income in a properly specified price equation would be strongly positive. The reason they felt that the coefficient of per capita income would measure price discrimination went as follows: the higher the ability to pay, the lower (in absolute value) the price elasticity of demand for pharmaceuticals and the higher the price a price discriminator could charge. In addition, the authors expected that prices would be higher if pharmaceutical patents were allowed and that prices would be lower if price controls existed, if competition was encouraged, or if the pharmaceutical market in a country was relatively large. Their estimates were (standard errors in parentheses):
a. Develop and test appropriate hypotheses concerning the regression coefficients using the t-test at the 5-percent level.
b. Set up 90-percent confidence intervals for each of the estimated slope coefficients.
c. Do you think Schut and VanBergeijk concluded that international price discrimination exists? Why or why not?
d. How would the estimated results have differed if the authors had not divided each country’s prices, per capita income, and per capitapharmaceutical consumption by that of the United States? Explain your answer.
e. Reproduce their regression results by using the EViews computer program (datafile DRUGS5) or your own computer program and the data from Table 1.
Already registered? Login
Not Account? Sign up
Enter your email address to reset your password
Back to Login? Click here