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):

Where:

P_i = the pharmaceutical price level in the ith country divided by that of the United States

GDPN_i = per capita domestic product in the ith country divided by that of the United States

CVN_i = per capita volume of consumption of pharmaceuticals in the ith country divided by that of the United States

PP_i = a dummy variable equal to 1 if patents for pharmaceutical products are recognized in the ith country, 0 otherwise

DPC_i = a dummy variable equal to 1 if the ith country applied strict price controls, 0 otherwise

PC_i = a dummy variable equal to 1 if the ith country encouraged price competition, 0 otherwise

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 capita pharmaceutical consumption by that of the United States? Explain your answer.

P = 38.22 + 1.43GDPN; 0.GCVN; + 7.31PP; (6.12) 1.19 (0.21) (0.22) 6.69 -2.66 - 15.63DPC; 11.38PC; (6.93) t = - 2.25 (7.16) - 1.59 R? = .775 N = 32