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Price Caps versus Reimbursement Limits: Pharmaceutical Regulation under Market Integration through Parallel Trade

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  • Birg, Laura

Abstract

In this paper, I study the effect of parallel trade (cross border resale of goods without the authorization of the manufacturer) on pharmaceutical regulation in a North-South framework with a firm's endogenous decision to export to the South. Governments in both countries may limit prices directly via price caps or restrict third-party payer reimbursement for the drug via reimbursement limits. Parallel trade may relax regulation in the source country of parallel imports (South) and intensify regulation in the destination country (North): In the source country, parallel trade may relax regulation both under a price cap and a reimbursement limit under certain conditions. In the destination country, parallel trade has no effect on the level of regulation under a price cap, and it intensifies regulation under a reimbursement limit. Parallel trade may change regulatory preferences: Under no parallel trade, both the source and destination country set prices caps. Under parallel trade, the source country sets a price cap, but the destination country sets a reimbursement, thereby enforcing a higher price cap in the South. This implies higher drug prices under parallel trade in both source and destination country.

Suggested Citation

  • Birg, Laura, 2019. "Price Caps versus Reimbursement Limits: Pharmaceutical Regulation under Market Integration through Parallel Trade," University of Göttingen Working Papers in Economics 253, University of Goettingen, Department of Economics, revised 2019.
    • Handle: RePEc:zbw:cegedp:253
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    References listed on IDEAS

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    More about this item

    Keywords

    pharmaceutical regulation; price cap; reimbursement limit; parallel trade;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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