IDEAS home Printed from https://ideas.repec.org/p/iae/iaewps/wp2016n08.html
   My bibliography  Save this paper

Parallel Trade of Pharmaceuticals: The Danish Market for Statins

Author

Listed:
  • Susan J. Méndez

    () (Melbourne Institute of Applied Economics and Social Research, The University of Melbourne)

Abstract

The goal of this paper is to investigate and quantify the impact of parallel trade in markets for pharmaceuticals. The paper develops a structural model of demand and supply using data on prices, sales and characteristics of statins, medicines used in the treatment for high cholesterol, in Denmark. The model provides a framework to simulate outcomes under a complete ban of parallel imports, keeping other regulatory schemes unchanged. There are two sets of key results from prohibiting parallel imports. The first set focuses on price effects, which differ substantially along two dimensions: the patent protection status of the molecule and the type of the firm. On average, prices increase more in markets where the molecule has lost patent protection. On the other dimension, both generic firms and original producers increase their pharmacy purchase prices when competition from parallel importers is removed. Given the prevailing reimbursement rules, most changes in pharmacy purchase prices are absorbed by the government. The final price paid by consumers after reimbursement increases more for original firms than for generic producers. The second set of empirical results reports the effects on market participants. My model takes into consideration consumers’ preferences allowing them to substitute between products. Prohibiting parallel imports induces consumers to substitute towards original products for which they have stronger preferences. In sum, banning parallel imports leads to (i) an increase in variable profits for original producers and a decrease for generic firms, (ii) an increase in governmental health care expenditures, and (iii) a decrease in consumers’ welfare.

Suggested Citation

  • Susan J. Méndez, 2016. "Parallel Trade of Pharmaceuticals: The Danish Market for Statins," Melbourne Institute Working Paper Series wp2016n08, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2016n08
    as

    Download full text from publisher

    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2016n08.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Szymanski, Stefan & Valletti, Tommaso, 2005. "Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis," CEPR Discussion Papers 5022, C.E.P.R. Discussion Papers.
    2. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas & Ullrich, Hannes, 2014. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," Journal of Health Economics, Elsevier, vol. 36(C), pages 174-187.
    3. Berndt, Ernst R. & Dubois, Pierre, 2012. "Impacts of Patent Expiry and Regulatory Policies on Daily Cost of Pharmaceutical Treatments: OECD Countries, 2004-2010," IDEI Working Papers 702, Institut d'Économie Industrielle (IDEI), Toulouse.
    4. Lee G. Branstetter & Chirantan Chatterjee & Matthew Higgins, 2011. "Regulation and Welfare: Evidence from Paragraph IV Generic Entry in the Pharmaceutical Industry," NBER Working Papers 17188, National Bureau of Economic Research, Inc.
    5. Tommaso M. Valletti & Stefan Szymanski, 2006. "PARALLEL TRADE, INTERNATIONAL EXHAUSTION AND INTELLECTUAL PROPERTY RIGHTS: A WELFARE ANALYSIS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 499-526, December.
    6. Panos Kanavos & Joan Costa-Font, 2005. "Pharmaceutical parallel trade in Europe: stakeholder and competition effects," Economic Policy, CEPR;CES;MSH, vol. 20(44), pages 751-798, October.
    7. Li, Changying & Maskus, Keith E., 2006. "The impact of parallel imports on investments in cost-reducing research and development," Journal of International Economics, Elsevier, vol. 68(2), pages 443-455, March.
    8. Lopez-Casasnovas, Guillem & Puig-Junoy, Jaume, 2000. "Review of the literature on reference pricing," Health Policy, Elsevier, vol. 54(2), pages 87-123, November.
    9. Valletti, Tommaso M., 2006. "Differential pricing, parallel trade, and the incentive to invest," Journal of International Economics, Elsevier, vol. 70(1), pages 314-324, September.
    10. Tomaso Duso & Annika Herr & Moritz Suppliet, 2014. "The Welfare Impact Of Parallel Imports: A Structural Approach Applied To The German Market For Oral Anti‐Diabetics," Health Economics, John Wiley & Sons, Ltd., vol. 23(9), pages 1036-1057, September.
    11. Kyle Margaret, 2011. "Strategic Responses to Parallel Trade," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(2), pages 1-34, January.
    12. Cardell, N. Scott, 1997. "Variance Components Structures for the Extreme-Value and Logistic Distributions with Application to Models of Heterogeneity," Econometric Theory, Cambridge University Press, vol. 13(02), pages 185-213, April.
    13. Dubois, Pierre & Lasio, Laura, 2014. "Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals," IDEI Working Papers 823, Institut d'Économie Industrielle (IDEI), Toulouse.
    14. Gene M. Grossman & Edwin L.-C. Lai, 2008. "Parallel imports and price controls," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 378-402.
    15. Antara Dutta, 2011. "From Free Entry to Patent Protection: Welfare Implications for the Indian Pharmaceutical Industry," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 160-178, February.
    16. Brekke, Kurt R. & Grasdal, Astrid L. & Holms, Tor Helge, 2009. "Regulation and pricing of pharmaceuticals: Reference pricing or price cap regulation?," European Economic Review, Elsevier, vol. 53(2), pages 170-185, February.
    17. Frank Verboven, 1996. "International Price Discrimination in the European Car Market," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 240-268, Summer.
    18. Abe Dunn, 2012. "Drug Innovations and Welfare Measures Computed from Market Demand: The Case of Anti-cholesterol Drugs," American Economic Journal: Applied Economics, American Economic Association, vol. 4(3), pages 167-189, July.
    19. Nina Pavcnik, 2002. "Do Pharmaceutical Prices Respond to Potential Patient Out-of-Pocket Expenses?," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 469-487, Autumn.
    20. Danzon, Patricia M. & Chao, Li-Wei, 2000. "Cross-national price differences for pharmaceuticals: how large, and why?," Journal of Health Economics, Elsevier, vol. 19(2), pages 159-195, March.
    21. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    22. Grabowski, Henry G & Vernon, John M, 1992. "Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 331-350, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Pharmaceutical markets; parallel trade; regulation; welfare analysis;

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iae:iaewps:wp2016n08. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sheri Carnegie). General contact details of provider: http://edirc.repec.org/data/mimelau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.