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Impact of Parallel Imports on Pricing and Product Launch Decisions in Pharmaceutical Industry

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  • Mehmet Sekip Altug
  • Ozge Sahin

Abstract

Product launch and pricing decisions in the pharmaceutical industry across different countries are complex. Although introducing a newly developed drug to every country is beneficial to patients worldwide, doing so may have adverse implications for drug developers, such as the emergence of parallel imports. We study a pharmaceutical firm that already introduced a pioneering drug in its home country, where the product is protected by patent rules. The firm decides whether to launch in a second country in the same region, where parallel import between these two countries is feasible and profitable for the parallel importer. We characterize the joint pricing and product launch decision. We show the firm chooses one of three strategies: (i) launch and accommodate parallel import, (ii) launch and deter parallel import, and (iii) not launch. We show that firms are more likely not to launch the drug when the drug price is determined through a negotiation between the firm and the government. We discuss how insurance coverage, market size, quality perception of the parallel imported drug, and valuations affect these strategies. We then study the impact of launch and pricing decisions on social welfare and discuss policy implications for the regulators and potential strategies for the firm to mitigate the negative effects of a parallel import threat. We also study the impact of perfect and imperfect competition among parallel import firms on firm's price and launch decisions. Finally, we discuss the practice of distributing rebates as a post‐launch strategy to manage parallel imports.

Suggested Citation

  • Mehmet Sekip Altug & Ozge Sahin, 2019. "Impact of Parallel Imports on Pricing and Product Launch Decisions in Pharmaceutical Industry," Production and Operations Management, Production and Operations Management Society, vol. 28(2), pages 258-275, February.
  • Handle: RePEc:bla:popmgt:v:28:y:2019:i:2:p:258-275
    DOI: 10.1111/poms.12908
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    Cited by:

    1. Iacocca, Kathleen & Mahar, Stephen & Daniel Wright, P., 2022. "Strategic horizontal integration for drug cost reduction in the pharmaceutical supply chain," Omega, Elsevier, vol. 108(C).
    2. Huang, Hongfu & He, Yong & Chen, Jing, 2020. "Cross-market selling channel strategies in an international luxury brand's supply chain with gray markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 144(C).
    3. Wang, Yingjia & Lin, Jiaxin & Choi, Tsan-Ming, 2020. "Gray market and counterfeiting in supply chains: A review of the operations literature and implications to luxury industries," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 133(C).
    4. Rajesh Bagchi & Sung H. Ham & Chuan He, 2020. "Strategic Implications of Confirmation Bias‐Inducing Advertising," Production and Operations Management, Production and Operations Management Society, vol. 29(6), pages 1573-1596, June.
    5. Zhang, Yong & Zhang, Sheng Hao & Feng, Haofang, 2021. "The impacts of money-back guarantees in the presence of parallel importation," European Journal of Operational Research, Elsevier, vol. 295(1), pages 170-182.
    6. Misra, Akansha & Saranga, Haritha & Tripathi, Rajeev R, 2022. "Channel choice and incentives in the cadaveric organ supply chain," European Journal of Operational Research, Elsevier, vol. 302(3), pages 1202-1214.
    7. Li, Hai & Qing, Qiankai & Wang, Juan & Hong, Xianpei, 2021. "An analysis of technology licensing and parallel importation under different market structures," European Journal of Operational Research, Elsevier, vol. 289(1), pages 132-143.
    8. Chunming Xu & Debao Zhu, 2021. "On Conflicts between Pharmaceutical Patent Protection and the Right to Life and Health Based on a Stackelberg Game," IJERPH, MDPI, vol. 18(3), pages 1-13, January.

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