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REFERENCE PRICING - Making Parallel Trade in Pharmaceuticals Work

  • Yesim Köksal, Miyase


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

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    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.

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    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 367.

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    Length: 35 pages
    Date of creation: 17 Jun 2009
    Date of revision: 05 Jan 2011
    Handle: RePEc:hhs:gunwpe:0367
    Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
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    1. Miraldo, Marisa, 2009. "Reference pricing and firms' pricing strategies," Journal of Health Economics, Elsevier, vol. 28(1), pages 176-197, January.
    2. Jorge Mestre, 2003. "Reference prices: The Spanish way," Investigaciones Economicas, Fundación SEPI, vol. 27(1), pages 125-149, January.
    3. Malueg, D.A. & Schwartz, M., 1993. "Parallel Imports, Demand Dispersion and International Price Discrimination," Papers 93-6, U.S. Department of Justice - Antitrust Division.
    4. Maskus, Keith E. & Yongmin Chen, 2000. "Vertical price control and parallel imports - theory and evidence," Policy Research Working Paper Series 2461, The World Bank.
    5. Pecorino, Paul, 2002. "Should the US allow prescription drug reimports from Canada?," Journal of Health Economics, Elsevier, vol. 21(4), pages 699-708, July.
    6. Picot, Garnett & Myles, John, 2005. "Income Inequality and Low Income in Canada: an International Perspective," Analytical Studies Branch Research Paper Series 2005240e, Statistics Canada, Analytical Studies Branch.
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