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The effect of pharmacies’ right to negotiate discounts on the market share of parallel imported pharmaceuticals

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  • Granlund, David

    ()
    (HUI Research AB)

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    Abstract

    The market share for parallel imports when pharmacies can negotiate discounts with parallel traders and sellers of locally sourced products is analyzed both theoretically and empirically. The theoretical model shows that, with discount negotiations, pharmacies will sell locally sourced products to all consumers that prefer these or are indifferent between these and parallel imported products. The explanation is that the parallel traders have cost disadvantages because of their repacking and trading costs. Sellers of locally sourced products will therefore always underbid the marginal prices of parallel traders and this gives pharmacies an incentive to sell locally sourced products. The empirical results show that a reform allowing discount negotiations reduced the market share for parallel imports by about 11 percentage points to reach 31%. The most important mechanism is that the reform has reduced the probability that pharmacies offer consumers cheaper parallel imported substitutes.

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    Bibliographic Info

    Paper provided by HUI Research in its series HUI Working Papers with number 75.

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    Length: 34 pages
    Date of creation: 07 Nov 2012
    Date of revision:
    Handle: RePEc:hhs:huiwps:0075

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    Related research

    Keywords: Drugs; Margins; Parallel imports; Parallel trade; Pharmacies;

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    References

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    1. Brekke, Kurt Richard & Holmås, Tor Helge & Straume, Odd Rune, 2013. "Margins and market shares: Pharmacy incentives for generic substitution," European Economic Review, Elsevier, vol. 61(C), pages 116-131.
    2. 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.
    3. 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.
    4. David Granlund & Niklas Rudholm, 2011. "Consumer Information and Pharmaceutical Prices: Theory and Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(2), pages 230-254, 04.
    5. Granlund, David, 2010. "Price and welfare effects of a pharmaceutical substitution reform," Journal of Health Economics, Elsevier, vol. 29(6), pages 856-865, December.
    6. Granlund, David & Köksal , Miyase Yesim, 2011. "Parallel Imports and Mandatory Substitution Reform - A Kick or A Muff for Price Competition in Pharmaceuticals?," UmeÃ¥ Economic Studies 824, Umeå University, Department of Economics.
    7. 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.
    8. Leibowitz, Arleen & Manning, Willard G. & Newhouse, Joseph P., 1985. "The demand for prescription drugs as a function of cost-sharing," Social Science & Medicine, Elsevier, vol. 21(10), pages 1063-1069, January.
    9. Keith E. Maskus & Yongmin Chen, 2004. "Vertical Price Control and Parallel Imports: Theory and Evidence," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 551-570, 09.
    10. Jean-Pierre Dubé & Günter J. Hitsch & Peter E. Rossi, 2010. "State dependence and alternative explanations for consumer inertia," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 417-445.
    11. Ching, Andrew, 2008. "Consumer Learning and Heterogeneity: Dynamics of Demand for Prescription Drugs after Patent Expiration," MPRA Paper 7265, University Library of Munich, Germany.
    12. Kyle Margaret, 2011. "Strategic Responses to Parallel Trade," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(2), pages 1-34, January.
    13. Judith K. Hellerstein, 1998. "The Importance of the Physician in the Generic Versus Trade-Name Prescription Decision," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 108-136, Spring.
    14. David Granlund & Niklas Rudholm, 2012. "The Prescribing Physician’s Influence on Consumer Choice Between Medically Equivalent Pharmaceuticals," Review of Industrial Organization, Springer, vol. 41(3), pages 207-222, November.
    15. Lundin, Douglas, 2000. "Moral hazard in physician prescription behavior," Journal of Health Economics, Elsevier, vol. 19(5), pages 639-662, September.
    16. Nina Pavcnik, 2002. "Do Pharmaceutical Prices Respond to Potential Patient Out-of-Pocket Expenses?," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 469-487, Autumn.
    17. 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.
    18. Granlund, David, 2009. "Are private physicians more likely to veto generic substitution of prescribed pharmaceuticals?," Social Science & Medicine, Elsevier, vol. 69(11), pages 1643-1650, December.
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