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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

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Bibliographic Info

Article provided by Springer in its journal The European Journal of Health Economics.

Volume (Year): 14 (2013)
Issue (Month): 2 (April)
Pages: 345-355

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Handle: RePEc:spr:eujhec:v:14:y:2013:i:2:p:345-355

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Related research

Keywords: Parallel trade; Price control; Prescription drugs; F13; L51; I18;

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References

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  1. Raff, Horst & Schmitt, Nicolas, 2005. "Why Parallel Trade May Raise Producers' Profits," Economics Working Papers 2005,07, Christian-Albrechts-University of Kiel, Department of Economics.
  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.
  3. 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.
  4. Gene M. Grossman & Edwin C.-L. Lai, 2006. "Parallel Imports and Price Controls," NBER Working Papers 12423, National Bureau of Economic Research, Inc.
  5. 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.
  6. Maskus, Keith E. & Yongmin Chen, 2000. "Vertical price control and parallel imports - theory and evidence," Policy Research Working Paper Series 2461, The World Bank.
  7. Margaret K. Kyle, 2007. "Strategic Responses to Parallel Trade," NBER Working Papers 12968, National Bureau of Economic Research, Inc.
  8. Ganslandt, Mattias & Maskus, Keith E., 2001. "Parallel imports of pharmaceutical products in the European Union," Policy Research Working Paper Series 2630, The World Bank.
  9. 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.
  10. Ganslandt, Mattias & Maskus, Keith E., 2005. "Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets," Working Paper Series 639, Research Institute of Industrial Economics.
  11. 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 637-53, December.
  12. repec:reg:wpaper:258 is not listed on IDEAS
  13. 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.
  14. Pecorino, Paul, 2002. "Should the US allow prescription drug reimports from Canada?," Journal of Health Economics, Elsevier, vol. 21(4), pages 699-708, July.
  15. 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.
  16. Panos Kanavos & Joan Costa-Font, 2005. "Pharmaceutical parallel trade in Europe: stakeholder and competition effects," Economic Policy, CEPR & CES & MSH, vol. 20(44), pages 751-798, October.
  17. Li, Changying & Robles, Jack, 2007. "Product innovation and parallel trade," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 417-429, April.
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