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

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  • Shen Guo
  • Bin Hu
  • Hai Zhong

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. Copyright Springer-Verlag 2013

Suggested Citation

  • Shen Guo & Bin Hu & Hai Zhong, 2013. "Impact of parallel trade on pharmaceutical firm’s profits: rise or fall?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 14(2), pages 345-355, April.
    • Handle: RePEc:spr:eujhec:v:14:y:2013:i:2:p:345-355
    DOI: 10.1007/s10198-012-0380-0
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    References listed on IDEAS

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    1. Bennato, Anna Rita & Valletti, Tommaso, 2014. "Pharmaceutical innovation and parallel trade," International Journal of Industrial Organization, Elsevier, vol. 33(C), pages 83-92.
    2. Yongmin Chen & Keith Maskus, 2005. "Vertical Pricing and Parallel Imports," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 14(1), pages 1-18.
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    5. Gene M. Grossman & Edwin L.‐C. Lai, 2008. "Parallel imports and price controls," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 378-402, June.
    6. Bale, Harvey, Jr, 1998. "The Conflicts between Parallel Trade and Product Access and Innovation: The Case of Pharmaceuticals," Journal of International Economic Law, Oxford University Press, vol. 1(4), pages 637-653, December.
    7. Keith E. Maskus & Yongmin Chen, 2004. "Vertical Price Control and Parallel Imports: Theory and Evidence," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 551-570, September.
    8. Li, Changying & Maskus, Keith E., 2006. "The impact of parallel imports on investments in cost-reducing research and development," Journal of International Economics, Elsevier, vol. 68(2), pages 443-455, March.
    9. Ganslandt, Mattias & Maskus, Keith E., 2001. "Parallel imports of pharmaceutical products in the European Union," Policy Research Working Paper Series 2630, The World Bank.
    10. Kyle Margaret, 2011. "Strategic Responses to Parallel Trade," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(2), pages 1-34, January.
    11. Danzon, Patricia M. & Chao, Li-Wei, 2000. "Cross-national price differences for pharmaceuticals: how large, and why?," Journal of Health Economics, Elsevier, vol. 19(2), pages 159-195, March.
    12. Ganslandt, Mattias & Maskus, Keith E., 2007. "Vertical distribution, parallel trade, and price divergence in integrated markets," European Economic Review, Elsevier, vol. 51(4), pages 943-970, May.
    13. Valletti, Tommaso M., 2006. "Differential pricing, parallel trade, and the incentive to invest," Journal of International Economics, Elsevier, vol. 70(1), pages 314-324, September.
    14. Stefan Szymanski & Tommaso Valletti, 2005. "Parallel trade, price discrimination, investment and price caps [‘First report (final) to the Committee on International Trade Law of the International Law Association on the subject of parallel im," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 20(44), pages 706-749.
    15. Pecorino, Paul, 2002. "Should the US allow prescription drug reimports from Canada?," Journal of Health Economics, Elsevier, vol. 21(4), pages 699-708, July.
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    Cited by:

    1. Giorgio Gnecco & Berna Tuncay & Fabio Pammolli, 2018. "A Comparison of Game-Theoretic Models for Parallel Trade," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-57, September.
    2. Charitini Stavropoulou & Tommaso Valletti, 2015. "Compulsory licensing and access to drugs," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(1), pages 83-94, January.
    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 control; Prescription drugs; F13; L51; I18;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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