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Is medicines parallel trade ‘regulatory arbitrage’?

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  • Joan Costa-Font

    (London School of Economics and Political Science (LSE))

Abstract

Parallel trade (PT) is a phenomenon that takes place at the distribution level, when a patented product is diverted from the official distribution chain to another one where it competes as a parallel distributor. Although some research regards PT in Europe as a ‘common’ form of arbitrage, there are reasons to believe that it is a type of ‘regulatory arbitrage’ that does not necessarily produce equivalent welfare effects. We draw upon a unique dataset that contains source country records of parallel imported medicine sales to the Netherlands for one therapeutic group (statins), that accounts for 5 % of the market at the time of study and it faced no generic competition. We estimate precise differences in prices and statutory distribution margins for each source country/product and, examine whether they drive parallel import flows using a gravity specification and an instrumental variable strategy. Our findings reveal that parallel imports are driven by cross-country differences in statutory distribution margins in addition to price differences, consistently with the hypothesis of PT being a type of ‘regulatory arbitrage’.

Suggested Citation

  • Joan Costa-Font, 2016. "Is medicines parallel trade ‘regulatory arbitrage’?," International Journal of Health Economics and Management, Springer, vol. 16(4), pages 321-336, December.
    • Handle: RePEc:kap:ijhcfe:v:16:y:2016:i:4:d:10.1007_s10754-016-9199-z
    DOI: 10.1007/s10754-016-9199-z
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    References listed on IDEAS

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    Cited by:

    1. Pierre Dubois & Morten Sæthre, 2020. "On the Effect of Parallel Trade on Manufacturers' and Retailers' Profits in the Pharmaceutical Sector," Econometrica, Econometric Society, vol. 88(6), pages 2503-2545, November.
    2. Birg, Laura, 2019. "Reference pricing and parallel imports: Evidence from Germany," University of Göttingen Working Papers in Economics 362, University of Goettingen, Department of Economics.
    3. Birg, Laura, 2018. "Parallel Imports and Manufacturer Rebates," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181646, Verein für Socialpolitik / German Economic Association.
    4. David Granlund, 2022. "The Price Effects of Competition from Parallel Imports and Therapeutic Alternatives: Using Dynamic Models to Estimate the Causal Effect on the Extensive and Intensive Margins," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(1), pages 63-92, February.
    5. Birg, Laura, 2019. "Parallel imports and manufacturer rebates: Evidence from Germany," University of Göttingen Working Papers in Economics 363, University of Goettingen, Department of Economics.

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    More about this item

    Keywords

    Parallel trade; Parallel imports; Regulatory arbitrage; Pharmaceuticals; Supply chain;
    All these keywords.

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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