with smaller volume and higher costs to compete successfully. As a result, smaller countries often have only a few dominant private sector wholesalers. Much the same logic applies at the end of the distribution network. In rural areas and smaller towns, there is often not enough business to support more than one or two retail sellers. When a few sellers dominate a market, it is tempting for them to collude (either explicitly or implicitly) to limit price competition. They are also tempted to do what they can to deter new entrants to preserve their position. Examples include tying up retailers and manufacturers through exclusive contacts, offering volume discounts to hold onto exclusive relationships, and even threatening would-be competitors (or their customers). Such situations pose problems not only to private sector buyers, but also to public purchasers who are trying to use private sources to fill the gaps in a poorly functioning public sector supply chain (Patouillard, Hanson, and Goodman 2010). One way to summarize the impact of competition in wholesale markets is to look at how it affects markups—the difference between the seller’s cost and the selling price, expressed as a percentage of the seller’s cost. Markups vary widely from product to product, from country to country, and with the stage of the distribution system. General economic arguments suggest that the number of sellers competing for business in a market and the degree to which they use price competition as a tool will influence the size of markups. Product-to-product variation is also likely to occur, in part because wholesalers will try to charge higher margins where they believe that retailers will be able to pass on those higher costs to their customers more easily. Price markups from 10 percent to 100 percent—and even more—have been reported. And those are for products that pass through two or three stages between importation and final sale. A survey of medicine prices in Ghana, for example, found wholesale markups of 30 percent to 40 percent, and a similar retail markup, in the private sector. In the public sector, the survey found 20 percent wholesale markups and 10 percent retail markups (Medicine Prices in Ghana 2004). That markups occur in the public as well as the private sector reflects the fact that a number of low-income countries operate their public distribution systems on a cash-and-carry basis. That is, patients must pay hospitals or health centers for any medications dispensed, health centers have to pay district stores for supplies they receive, and district stores have to pay central stores, just as in the private sector. In part, this practice reflects the lack of funding available to governments and their desire to capture the same willingness to pay that attracts private sector sellers.
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Pharmaceutical Reform