The following extract discusses whether companies should give away their products free when the marginal cost of production is relatively high.

Giving products away free, from browsers to newspaper articles, is commonplace in the technology and media industries. The trend has now spread to vaccines.

Pharmaceuticals companies, scarred by years of losing the public relations battle to campaigners over the price of HIV/Aids drugs in Africa, are eager not to be caught out by swine flu. Andrew Witty, chief executive of GlaxoSmithKline, has offered to donate 50m doses of GSK’s planned swine flu vaccine to the World Heath Organisation. He has caught the public mood: Margaret Chan, WHO director-general, has urged ‘solidarity’ with poor countries over the H1N1 flu virus. Mr Witty and Ms Chan have forced Daniel Vasella, chief executive of Novartis, to defend the profit motive. He told the FT this week that Novartis did not want to follow the GSK example by giving away doses of its planned vaccine because ‘if you want to make production sustainable, you have to create financial incentives’. . . . [the article continues with a discussion of the arguments against free gift] . . .

First, if developing countries do not pay for vaccines, there is a danger that drugs companies will stop producing enough of them. Vaccines have a high marginal cost of production because they have to be cultured in eggs, and stored and distributed carefully.

Second, while there is a benefit to one-off donations of vaccines against adult pandemics such as swine flu, there is no point in a developing country vaccinating children one year with a donation of free medicines if it cannot afford to carry on with the programme.

Questions

1 Can a company sustain making free gifts of its products when the marginal cost of production is relatively high?
2 What does the first company see as the risk of charging the full cost of vaccines to all countries?