Impact of parallel trade on pharmaceutical firm’s profits: rise or fall?
- 640 Downloads
Most existing studies on parallel trade conclude that it reduces pharmaceutical firms’ profits. One special feature of the pharmaceutical industry is the presence of price regulation in most countries. Taking into account the impact of parallel trade on the regulated pharmaceutical prices [Pecorino, P.: J. Health Econ. 21, 699–708 (2002)] shows that a pharmaceutical firm’s profit is greater in the presence of parallel trade. The present paper relaxes the assumption on identical demands among countries, and takes into account transaction costs. The results of our model show that a firm’s profits may increase or decrease in the presence of parallel trade, depending on its bargaining power in the price negotiation and market size of the drug. Changes in social welfare due to the transition to parallel trade regime are also considered.
KeywordsParallel trade Price control Prescription drugs
JEL ClassificationF13 L51 I18
We would like to thank Jerry Hurley, Ross McKitrick, John Leach and two anonymous referees for their valuable comments and suggestions. Any mistakes are our own.
- 1.Armengod, H.: Parallel trade of medicinal products in the EU—latest developments. Hogan and Hartson, Pharma Law Europe (2008)Google Scholar
- 3.Bennato, A.R., Valletti, T.: Pharmaceutical innovation and parallel trade. Paper Presented at the 12th CEPR/JIE Conference on Applied Industrial Organization (2011)Google Scholar
- 7.Danzon, P., Furukawa, M.: Prices and availability of pharmaceuticals: evidence from nine countries. Health Affairs Web Exclusive (2003). doi: 10.1377/hlthaff.w3.521
- 9.European Federation of Pharmaceutical Industries and Associations: the Pharmaceutical Industry in Figures—2009 Update. EFPIA, Brussels (2010)Google Scholar
- 12.Grootendorst, P.: The economics of cross border trade in pharmaceuticals: theory and evidence. J. Pharm. Mark. Manag. 16, 101–111 (2005)Google Scholar
- 15.Kanavos, P., Costa-i-Font, J., Merkur, S., Gemmill, M.: The economic impact of pharmaceutical parallel trade in European Union member states: a stakeholder analysis. LSE Health and Social Care Special Research Paper (2004)Google Scholar
- 16.Kyle, M.: Strategic responses to parallel trade. B.E. J. Econ. Anal. Policy. 11(2 Advances): Article 2 (2011)Google Scholar