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The Welfare Impact of Parallel Imports: A Structural Approach Applied to the German Market for Oral Anti-Diabetics

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  • Tomaso Duso
  • Annika Herr
  • Moritz Suppliet

Abstract

We investigate the welfare impact of parallel imports using a large panel data set containing monthly information on sales, ex-factory prices, and further product characteristics for all 700 anti-diabetic drugs sold in Germany between 2004 and 2010. We estimate a two-stage nested logit model of demand and, based on an oligopolistic model of multiproduct firms, we then recover the marginal costs and markups. We finally evaluate the effect of the parallel imports’ policy by calculating a counter-factual scenario without parallel trade. According to our estimates, parallel imports reduce the prices for patented drugs by 11% and do not have a significant effect on prices for generic drugs. This amounts to an increase in the demand-side surplus by €19 million per year (or €130 million in total) which is relatively small compared to the average annual market size of around €227 million based on ex-factory prices. The variable profits for the manufacturers of original drugs from the German market are reduced by 18 million (or 37%) per year when parallel trade is allowed, yet only one third of this difference is appropriated by the importers.

Suggested Citation

  • Tomaso Duso & Annika Herr & Moritz Suppliet, 2014. "The Welfare Impact of Parallel Imports: A Structural Approach Applied to the German Market for Oral Anti-Diabetics," Discussion Papers of DIW Berlin 1373, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1373
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    References listed on IDEAS

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    Cited by:

    1. Herr, A. & Suppliet, M., 2011. "Co-Payment Exemptions and Reference Prices: an Empirical Study of Pharmaceutical Prices in Germany," Health, Econometrics and Data Group (HEDG) Working Papers 11/18, HEDG, c/o Department of Economics, University of York.
    2. Susan J. Méndez, 2018. "Parallel trade of pharmaceuticals: The Danish market for statins," Health Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 333-356, February.
    3. Rebecca Cleary & Jean-Paul Chavas, 2022. "Strategic supermarket pricing of private labels and manufacturer brands," Empirical Economics, Springer, vol. 62(6), pages 2921-2950, June.
    4. Mats A. Bergman & David Granlund & Niklas Rudholm, 2016. "Reforming the Swedish pharmaceuticals market: consequences for costs per defined daily dose," International Journal of Health Economics and Management, Springer, vol. 16(3), pages 201-214, September.
    5. Laura Birg, 2023. "Pharmaceutical regulation under market integration through parallel trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1322-1346, November.
    6. Pierre Dubois & Morten Sæthre, 2020. "On the Effect of Parallel Trade on Manufacturers' and Retailers' Profits in the Pharmaceutical Sector," Econometrica, Econometric Society, vol. 88(6), pages 2503-2545, November.
    7. Suppliet, Moritz & Herr, Annika, 2016. "Cost-Sharing and Drug Pricing Strategies : Introducing Tiered Co-Payments in Reference Price Markets," Other publications TiSEM 4d692f0e-8577-4392-b413-2, Tilburg University, School of Economics and Management.
    8. 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.
    9. David Granlund & Miyase Koksal-Ayhan, 2015. "Parallel imports and a mandatory substitution reform: a kick or a muff for price competition in pharmaceuticals?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(9), pages 969-983, December.
    10. Eduardo Costa & Carolina Santos, 2022. "Pharmaceutical pricing dynamics in an internal reference pricing system: evidence from changing drugs’ reimbursements," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(9), pages 1497-1518, December.
    11. 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.
    12. Reisinger, Markus & Saurí, Lluís & Zenger, Hans, 2019. "Parallel imports, price controls, and innovation," Journal of Health Economics, Elsevier, vol. 66(C), pages 163-179.
    13. Bokhari, Farasat A.S. & Mariuzzo, Franco, 2018. "Demand estimation and merger simulations for drugs: Logits v. AIDS," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 653-685.
    14. Suppliet, Moritz, 2020. "Umbrella branding in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 73(C).
    15. Bokhari, Farasat A.S. & Mariuzzo, Franco & Yan, Weijie, 2024. "Antibacterial resistance and the cost of affecting demand: The case of UK antibiotics," International Journal of Industrial Organization, Elsevier, vol. 95(C).
    16. Granlund David & Köksal-Ayhan Miyase Yesim, 2016. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals: Has the Price Competition increased?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 1069-1092, April.
    17. Sarmah, Archita & De Giovanni, Domenico & De Giovanni, Pietro, 2020. "Compulsory licenses in the pharmaceutical industry: Pricing and R&D strategies," European Journal of Operational Research, Elsevier, vol. 282(3), pages 1053-1069.
    18. David Granlund, 2022. "The Price Effects of Competition from Parallel Imports and Therapeutic Alternatives: Using Dynamic Models to Estimate the Causal Effect on the Extensive and Intensive Margins," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(1), pages 63-92, February.
    19. Toon van der Gronde & Carin A Uyl-de Groot & Toine Pieters, 2017. "Addressing the challenge of high-priced prescription drugs in the era of precision medicine: A systematic review of drug life cycles, therapeutic drug markets and regulatory frameworks," PLOS ONE, Public Library of Science, vol. 12(8), pages 1-34, August.
    20. repec:iae:iaewps:wp2016n8 is not listed on IDEAS
    21. Farasat A.S. Bokhari & Franco Mariuzzo & Weijie Yan, 2019. "Antibacterial resistance and the cost of affecting demand: the case of UK antibiotics," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2019-03, Centre for Competition Policy, University of East Anglia, Norwich, UK..

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    More about this item

    Keywords

    Parallel imports; pharmaceuticals; structural models; anti-diabetic drugs;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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