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Drug innovation, price controls, and parallel trade

Author

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  • Giorgio Matteucci

    (Sapienza – Università di Roma)

  • Pierfrancesco Reverberi

    (Sapienza – Università di Roma)

Abstract

We study the long-run welfare effects of parallel trade (PT) in pharmaceuticals. We develop a two-country model of PT with endogenous quality, where the pharmaceutical firm negotiates the price of the drug with the government in the foreign country. We show that, even though the foreign government does not consider global R&D costs, (the threat of) PT improves the quality of the drug as long as the foreign consumers’ valuation of quality is high enough. We find that the firm’s short-run profit may be higher when PT is allowed. Nonetheless, this is neither necessary nor sufficient for improving drug quality in the long run. We also show that improving drug quality is a sufficient condition for PT to increase global welfare. Finally, we show that, when PT is allowed, drug quality may be higher with than without price controls.

Suggested Citation

  • Giorgio Matteucci & Pierfrancesco Reverberi, 2017. "Drug innovation, price controls, and parallel trade," International Journal of Health Economics and Management, Springer, vol. 17(2), pages 159-179, June.
    • Handle: RePEc:kap:ijhcfe:v:17:y:2017:i:2:d:10.1007_s10754-016-9205-5
    DOI: 10.1007/s10754-016-9205-5
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    References listed on IDEAS

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    Cited by:

    1. Chiara Conti & Pierfrancesco Reverberi, 2019. "Price discrimination and product quality under opt-in privacy regulation," DIAG Technical Reports 2019-07, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    2. Conti, Chiara & Reverberi, Pierfrancesco, 2021. "Price discrimination and product quality under opt-in privacy regulation," Information Economics and Policy, Elsevier, vol. 55(C).
    3. Giorgio Gnecco & Fabio Pammolli & Berna Tuncay, 2022. "Welfare and research and development incentive effects of uniform and differential pricing schemes," Computational Management Science, Springer, vol. 19(2), pages 229-268, June.

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    More about this item

    Keywords

    Parallel trade; Price controls; R&D investment; Prescription drugs; Intellectual property rights;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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