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The European Journal of Health Economics

, Volume 14, Issue 2, pp 345–355 | Cite as

Impact of parallel trade on pharmaceutical firm’s profits: rise or fall?

  • Shen Guo
  • Bin Hu
  • Hai ZhongEmail author
Original Paper

Abstract

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.

Keywords

Parallel trade Price control Prescription drugs 

JEL Classification

F13 L51 I18 

Notes

Acknowledgments

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.

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Copyright information

© Springer-Verlag 2012

Authors and Affiliations

  1. 1.School of Public Finance and Public PolicyCentral University of Finance and EconomicsBeijingChina

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