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REFERENCE PRICING - Making Parallel Trade in Pharmaceuticals Work

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  • Yesim Köksal, Miyase

    () (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

Should governments allow parallel trade of pharmaceuticals? There is no clear-cut answer to this question, since parallel trade causes some public concerns. One is that prices might not decrease much in the home country because consumers are price insensitive as a result of medical insurance. Another one is that consumers in the foreign country might face higher prices or supply shortages, since manufacturers want to deter parallel trade. And a third one is that consuming parallel imported drug, since it is perceived as inferior, creates additional cost. This paper provides answers to these concerns by taking into account the so-called healthcare reimbursement policy of reference pricing, requiring consumers to pay the full extra cost if they don’t buy the cheaper (parallel imported) alternative. It is then shown that parallel trade gives rise to more substantial price reductions under reference pricing than under coinsurance in the home (importing) country while, contrary to intuition, leaving price unchanged in the foreign (exporting) country. Even if parallel trade creates a social cost accrued from perceived quality difference, it would not be aggravated by reference pricing.

Suggested Citation

  • Yesim Köksal, Miyase, 2009. "REFERENCE PRICING - Making Parallel Trade in Pharmaceuticals Work," Working Papers in Economics 367, University of Gothenburg, Department of Economics, revised 01 May 2011.
  • Handle: RePEc:hhs:gunwpe:0367
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    File URL: http://hdl.handle.net/2077/20431
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    References listed on IDEAS

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    1. Malueg, David A. & Schwartz, Marius, 1994. "Parallel imports, demand dispersion, and international price discrimination," Journal of International Economics, Elsevier, vol. 37(3-4), pages 167-195, November.
    2. Miraldo, Marisa, 2009. "Reference pricing and firms' pricing strategies," Journal of Health Economics, Elsevier, vol. 28(1), pages 176-197, January.
    3. Jorge Mestre, 2003. "Reference prices: The Spanish way," Investigaciones Economicas, Fundación SEPI, vol. 27(1), pages 125-149, January.
    4. 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, September.
    5. Myles, John & Picot, Garnett, 2005. "Income Inequality and Low Income in Canada: an International Perspective," Analytical Studies Branch Research Paper Series 2005240e, Statistics Canada, Analytical Studies Branch.
    6. Pecorino, Paul, 2002. "Should the US allow prescription drug reimports from Canada?," Journal of Health Economics, Elsevier, vol. 21(4), pages 699-708, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Parallel Imports; Pharmaceuticals; Reference Pricing;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • I10 - Health, Education, and Welfare - - Health - - - General
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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