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The Economics of Parallel Trade

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Author Info

  • Patricia M. Danzon

    (Health Care Department, The Wharton School, University of Pennsylvania, Philadelphia, USA)

Abstract

The potential for parallel trade in the European Union (EU) has grown with the accession of low price countries and the harmonisation of registration requirements. Parallel trade implies a conflict between the principle of autonomy of member states to set their own pharmaceutical prices, the principle of free trade and the industrial policy goal of promoting innovative research and development (R&D). Parallel trade in pharmaceuticals does not yield the normal efficiency gains from trade because countries achieve low pharmaceutical prices by aggressive regulation, not through superior efficiency. In fact, parallel trade reduces economic welfare by undermining price differentials between markets. Pharmaceutical R&D is a global joint cost of serving all consumers worldwide; it accounts for roughly 30% of total costs. Optimal (welfare maximising) pricing to cover joint costs (Ramsey pricing) requires setting different prices in different markets, based on inverse demand elasticities. By contrast, parallel trade and regulation based on international price comparisons tend to force price convergence across markets. In response, manufacturers attempt to set a uniform `euro' price. The primary losers from `euro' pricing will be consumers in low income countries who will face higher prices or loss of access to new drugs. In the long run, even higher income countries are likely to be worse off with uniform prices, because fewer drugs will be developed. One policy option to preserve price differentials is to exempt on-patent products from parallel trade. An alternative is confidential contracting between individual manufacturers and governments to provide country-specific ex post discounts from the single `euro' wholesale price, similar to rebates used by managed care in the US. This would preserve differentials in transactions prices even if parallel trade forces convergence of wholesale prices.

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Bibliographic Info

Article provided by Springer Healthcare | Adis in its journal PharmacoEconomics.

Volume (Year): 13 (1998)
Issue (Month): 3 ()
Pages: 293-304

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Handle: RePEc:wkh:phecon:v:13:y:1998:i:3:p:293-304

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Web page: http://pharmacoeconomics.adisonline.com/

Related research

Keywords: Pharmacoeconomics; Reviews-on-treatment; Cost-allocation; Pharmaceutical-industry; Health-policy; Health-economics;

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Cited by:
  1. Duso, Tomaso & Herr, Annika & Suppliet, Moritz, 2014. "The welfare impact of parallel imports: A structural approach applied to the German market for oral anti-diabetics," DICE Discussion Papers 137, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  2. Gene M. Grossman & Edwin C.-L. Lai, 2006. "Parallel Imports and Price Controls," NBER Working Papers 12423, National Bureau of Economic Research, Inc.
  3. Stefan Felder, 2006. "Third-Degree Price Discrimination in the Presence of Subsidies," German Economic Review, Verein für Socialpolitik, vol. 7, pages 419-426, November.
  4. Panos Kanavos & Sotiris Vandoros, 2010. "Competition in prescription drug markets: is parallel trade the answer?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(5), pages 325-338.
  5. Frank Mueller‐Langer, 2012. "Parallel Trade and its Ambiguous Effects on Global Welfare," Review of International Economics, Wiley Blackwell, vol. 20(1), pages 177-185, 02.
  6. Patricia M. Danzon & Y. Richard Wang & Liang Wang, 2003. "The Impact of Price Regulation on the Launch Delay of New Drugs - Evidence from Twenty-Five Major Markets in the 1990s," NBER Working Papers 9874, National Bureau of Economic Research, Inc.
  7. Ganslandt, Mattias & Maskus, Keith E., 2004. "Parallel imports and the pricing of pharmaceutical products: evidence from the European Union," Journal of Health Economics, Elsevier, vol. 23(5), pages 1035-1057, September.
  8. Ismo Linnosmaa & Raine Hermans & Taru Hallinen, 2004. "Price-cost margin in the pharmaceutical industry," The European Journal of Health Economics, Springer, vol. 5(2), pages 122-128, May.
  9. Izabela Jelovac & Catalina Bordoy, 2005. "Pricing and Welfare Implications of Parallel Imports in the Pharmaceutical Industry," International Journal of Health Care Finance and Economics, Springer, vol. 5(1), pages 5-21, January.
  10. Rajat Acharyya & Maria D.C. Garcia-Alonso, 2009. "Weak IPR and Imitation in the South and International Exhaustion of Patent Rights in the North for Innovated Drugs: A Policy Game," Studies in Economics 0919, Department of Economics, University of Kent.
  11. Patricia M. Danzon & Eric L. Keuffel, 2013. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484 National Bureau of Economic Research, Inc.
  12. 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.
  13. Ganslandt, Mattias & Maskus, Keith E., 2001. "Parallel imports of pharmaceutical products in the European Union," Policy Research Working Paper Series 2630, The World Bank.
  14. Bordoy,Catalina & Jelovac,Izabela, 2003. "Pricing and Welfare of Parallel Imports in the Pharmaceutical Industry," Research Memorandum 004, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
  15. Königbauer, Ingrid, 2006. "Dealing with Rising Health Care Costs: The Case of Pharmaceuticals," Munich Dissertations in Economics 5640, University of Munich, Department of Economics.

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