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Strategic Responses to Parallel Trade

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  • Kyle Margaret

    ()
    (Toulouse School of Economics)

Abstract

High prices for patented pharmaceuticals have prompted many governments to consider allowing competition from “parallel imports,” or products first sold at lower prices in other countries. This paper examines how pharmaceutical firms have responded to changes in intellectual property rights and trade barriers that legalized parallel imports within the European Union (EU). The threat of arbitrage by parallel traders reduces the ability of firms to price discriminate across countries. Due to regulations on price and antitrust law on rationing supply, pharmaceutical firms may rely on non-price responses. Such responses include differentiation of products across countries and selective “culling” of product lines to reduce arbitrage opportunities, as well as raising arbitrageurs’ costs through choice of packaging. Using a dataset of drug prices and sales from 1993-2004 covering 30 countries, I find evidence that the behavior of pharmaceutical firms in the EU with respect to their product portfolios is consistent with attempts to reduce parallel trade. This may at least partially explain why parallel trade has not yet resulted in significant price convergence across EU countries. Accounting for non-price strategic responses may therefore be important in assessing the welfare effects of competition from parallel imports.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 11 (2011)
Issue (Month): 2 (January)
Pages: 1-34

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Handle: RePEc:bpj:bejeap:v:11:y:2011:i:2:n:2

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  1. Austan Goolsbee & Chad Syverson, 2004. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," Working Papers 04-04, NET Institute, revised Dec 2004.
  2. Szymanski, Stefan & Valletti, Tommaso, 2005. "Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis," CEPR Discussion Papers 5022, C.E.P.R. Discussion Papers.
  3. Anderson, Simon P & Ginsburgh, Victor A, 1999. "International Pricing with Costly Consumer Arbitrage," Review of International Economics, Wiley Blackwell, vol. 7(1), pages 126-39, February.
  4. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, vol. 23(9), pages 1269-1284, 09.
  5. Malueg, David A. & Schwartz, Marius, 1994. "Parallel imports, demand dispersion, and international price discrimination," Journal of International Economics, Elsevier, vol. 37(3-4), pages 167-195, November.
  6. Margaret K. Kyle, 2007. "Pharmaceutical Price Controls and Entry Strategies," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 88-99, February.
  7. Michael J. Mazzeo, 2002. "Product Choice and Oligopoly Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 221-242, Summer.
  8. Ganslandt, Mattias & Maskus, Keith E., 2001. "Parallel Imports of Pharmaceutical Products in the European Union," Working Paper Series 546, Research Institute of Industrial Economics.
  9. Leemore S. Dafny, 2005. "Games Hospitals Play: Entry Deterrence in Hospital Procedure Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(3), pages 513-542, 09.
  10. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  11. Pinelopi K. Goldberg & Frank Verboven, 2001. "Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market," NBER Working Papers 8402, National Bureau of Economic Research, Inc.
  12. 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.
  13. Mark Duggan & Fiona Scott Morton, 2004. "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," NBER Working Papers 10930, National Bureau of Economic Research, Inc.
  14. Stefan Szymanski & Tommaso Valletti, 2005. "Parallel trade, price discrimination, investment and price caps," Economic Policy, CEPR & CES & MSH, vol. 20(44), pages 705-749, October.
  15. Fiona M. Scott Morton, 1997. "The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules," Yale School of Management Working Papers ysm58, Yale School of Management.
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Citations

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Cited by:
  1. Malwina Mejer & Bruno Van Pottelsberghe, 2009. "Economic Incongruities in the European Patent System," Working Papers ECARES 2009_003, ULB -- Universite Libre de Bruxelles.
  2. Berndt, Ernst R. & Newhouse, Joseph P., 2010. "Pricing and Reimbursement in U.S. Pharmaceutical Markets," Working Paper Series rwp10-039, Harvard University, John F. Kennedy School of Government.
  3. Granlund, David & Yesim Köksal, Miyase, 2011. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals - What’s to Blame? Derogation or Perception?," UmeÃ¥ Economic Studies 831, Umeå University, Department of Economics.
  4. Berndt, Ernst R & Dubois, Pierre, 2012. "Impacts of Patent Expiry and Regulatory Policies on Daily Cost of Pharmaceutical Treatments: OECD Countries, 2004-2010," CEPR Discussion Papers 9140, C.E.P.R. Discussion Papers.
  5. Duso, T.; & Herr, A.; & Suppliet, M, 2014. "The Welfare Impact of Parallel Imports: A Structural Approach Applied to the German Market for Oral Anti-diabetics," Health, Econometrics and Data Group (HEDG) Working Papers 14/09, HEDG, c/o Department of Economics, University of York.
  6. Granlund, David & Yesim Köksal, Miyase, 2011. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals. What's blame? Derogation or perception?," Working Papers in Economics 499, University of Gothenburg, Department of Economics.
  7. Granlund, David & Yesim Köksal, Miyase, 2011. "Parallel Imports and Mandatory Substitution Reform: A kick or a muff for price competition in pharmaceuticals," Working Papers in Economics 496, University of Gothenburg, Department of Economics.
  8. Nebibe Varol & Joan Costa-i-Font & Alistair McGuire, 2011. "Explaining Early Adoption on New Medicines: Regulation, Innovation and Scale," CESifo Working Paper Series 3459, CESifo Group Munich.
  9. Granlund, David & Köksal, Miyase Yesim, 2011. "Parallel Imports and Mandatory Substitution Reform - A Kick or A Muff for Price Competition in Pharmaceuticals?," HUI Working Papers 49, HUI Research.
  10. Pamina Koenig & Megan Macgarvie, 2009. "Regulatory policy and the location of bio-pharmaceutical FDI in Europe," PSE Working Papers halshs-00566800, HAL.
  11. 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, vol. 14(2), pages 345-355, April.
  12. Granlund, David & Yesim Köksal, Miyase, 2012. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals - What’s to Blame? Derogation or Perception?," HUI Working Papers 59, HUI Research.
  13. repec:hal:wpaper:halshs-00566800 is not listed on IDEAS
  14. Granlund, David, 2012. "The effect of pharmacies’ right to negotiate discounts on the market share of parallel imported pharmaceuticals," HUI Working Papers 75, HUI Research.

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