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Price Regulation and Parallel Imports of Pharmaceuticals

Author

Listed:
  • Brekke, Kurt R.

    () (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Holmås, Tor Helge

    () (Uni Rokkan Centre)

  • Straume, Odd Rune

    () (University of Minho)

Abstract

This paper studies the effects of price regulation and parallel imports in the on-patent pharmaceutical market. First, we develop a theory model in which a pharmacy negotiates producer prices with a brand-name firm and then sets retail prices. We show that the effects of price regulation crucially depend on whether the producer faces competition from parallel imports. While parallel imports improve the bargaining position of the pharmacy, price regulation counteracts this effect and may even be profitable for the producer. Second, we use a unique dataset with information on sales and prices at both producer and retail level for 165 substances over four years (2004-7). Exploiting exogenous variation in the regulated price caps, we show that stricter price regulation reduces competition from parallel imports. While the effect is clearly negative on producer profits for substances without parallel imports, the e¤ect is not significant for substances with parallel imports. Finally, we show that stricter price regulation reduces total expenditures, but the e¤ect is much stronger for substances with parallel import. Thus, our results suggest that price regulation may promote both static and dynamic efficiency in the presence of parallel imports.

Suggested Citation

  • Brekke, Kurt R. & Holmås, Tor Helge & Straume, Odd Rune, 2014. "Price Regulation and Parallel Imports of Pharmaceuticals," Discussion Paper Series in Economics 1/2014, Norwegian School of Economics, Department of Economics.
  • Handle: RePEc:hhs:nhheco:2014_001
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    References listed on IDEAS

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    More about this item

    Keywords

    Pharmaceutical market; Price regulation; Parallel imports.;

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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