The Price is Wrong

 

The fight against malaria is a grave one. It is known as a disease attributable to people who live in poverty. Poor people do not have enough money in order to get vaccinated. That’s why pharmaceutical companies do not focus on the fight against malaria and focus even more on less severe diseases where the patients more well-funded in order to buy their products. Until yet a vaccine against malaria does not exist. But there are a couple of measures in order to prevent malaria and try to reduce the number of infected persons. People should wear long and bright clothes during the day and especially in the night it is important to prevent the attack of a malaria-infected insect by using bednets. Several NGOs and governments offer bednets in developing countries. Some of them offer them for free, some of them charge a small user fee. But what is the best price in order to make sure that people will use them correctly and do not use them as fishing nets or other purposes?

  1. When people get the bednets for free, will they use them correctly?
  2. Will they purchase bednets if they have to pay for them?
  3. What about the long run? Do free nets discourage future purchases?

In the Paper “The Price is Wrong” Bates et al. discuss about the question whether we should charge small fees on important products and services for poor people or whether to distribute them for free. There have been several experiments in the past which focus on this questions with a specific look on the bednets-case. Cohen and Dupas offered long-lasting insecticidal bednets either for free or to low price that covers only a small amount of the total price. So, what are the results?

Result 1: Small price increases cause big drops in demand

There are social marketing programs that offer bednets to pregnant women in Kenya to a price of $ 0.75. It is cheap and prevents poor people from getting infected by malaria. I think all of you would agree if I say that this price is quite good and it is a very social initiative. But experiments in prenatal clinics in Kenya have shown that a price increase from $ 0 to $ 0.60 led to a drop of demand by 60 percentage points. Only 20% of all people in the experiment demanded for bednets. And the price is 20% below the social marketing program price.

You can see: A (for us) very small price increase leads to a huge drop in demand. In this point it should be clear that a free distribution is the better choice … but does it promote the correct use of bednets?

Result 2: Fees do not substantially promote use

In order to secure the use of an important product, several NGOs and governments charge user fees. They argue that the good’s value is higher, when they pay some money for it. But the point is that it does not matter if they received the bednets for free or if they paid for it. Experiments have shown that even in the long run (after one year) the share of active users was equal between the two groups.

Result 3: Willingness to pay is not equal to the ability to pay

It would make sense to charge user fees in order to provide the bednets to people who have the highest willingness to pay. But there are two sides of the same coin: the one side is the willingness to pay and the other side is the ability to pay. The people who need the bednets most would be the people who would have the highest willingness to pay. But if this group includes the poorest people, they would have the lowest ability to pay in the same moment. Hence, charging a small user fee would exclude the people who would need it most and therefore miss the aim.

Result 4: Positive long-term effects of free distribution

There is the claim of governments and NGOs that a free distribution leads to the effect that people are angry if they have to pay for the bednets in the future. Is this true? No! There have been two positive effects of a free distribution:

  1. The people who received the bednets for free were more likely to buy a bednet in the next period than people who bought them to subsidized prices.
  2. The neighbors of those people, who received free bednets were more likely to buy a net than those of had to pay for a bednet. Free distribution of bednets led to a higher share of people and furthermore to higher share of neighbors who enjoyed the benefits of bednets.

Bates et al. put it straight: “[…] people did not get used to receiving something for free; they got used to the benefits of bednets.”

Result 5: Higher ability to pay leads to a higher willingness to pay

As you have seen above, small price increases lead to high demand decreases. The point is that they simply do not have enough money to invest higher amounts for a bednet. Individuals had a higher willingness to pay when they received enough money to buy a net. Therefore, the above-noted distinction between the willingness to pay and the ability to pay (cf. result 3).  The time variable is an important one as well. If they had more time to raise funds, the demand fell less steeply than in the case where the buy decision was a “buy on the spot” decision.

All in all, we can see that it does make sense to distribute important products, e.g. health products for free in order to address a high number of recipients. Intuitively, the costs of a follow-up treatment of malaria-infected communities would be way higher than a provision with free bednets.

I would like to point out that a higher willingness to pay does not automatically signal a better use of it. If people (and their neighbors) cannot buy bednets, they cannot get used to their benefits. Furthermore, I want you to have a more sensitive look for the future, when social marketing programs build themselves up with their subsidized products. Do they really achieve their aims?

Governments and NGOs should make the step to a free distribution of important products and relinquish small revenue gains in order to achieve their aims.

If you want to have a deeper look into this topic I would like to invite you to have a look at the YouTube-presentation of Esther Duflo where she talks about social experiments in order to end poverty.

References:

2 thoughts on “The Price is Wrong

  1. i strongly agree with you that important health product should be distributed free of charge especially to the poor. Bed nets have proven beyond doubts to mitigate the global effects of malaria in developing countries. It is a disease that had killed so many poor people in the past and helping to eradicate it by means of charging a lower price would only seems to provoke more death because many of the poor won’t realised how important it is to their wel-being due to the wrong price. I strongly believed that most government in developing countries and NGOs too are providing such services to the poor for free rather than charging a fee for the good.

    Liked by 1 person

  2. Thank you for your comment! I want to add that distributing the health related products for free send some signal of positive paternalism. Moreover, hyperbolic discounting might be a problem, because costs incurred today yield benefits in the future. Therefore – in order to secure the right use – I would further suggest to make the use compulsory. A commitment to use the bednets properly will have positive effects on the whole society and the probability of a malaria-induced health trap might be decreased.

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