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Pharmaceutical Innovation and Parallel Trade

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  • Anna Rita Bennato

    (Centre for Competition Policy, University of East Anglia)

  • Tommaso Valletti

    (Imperial College London, University of Rome and CEPR)

Abstract

This paper investigates the effects yielded by the interaction between government regulation policies and parallel trade, with a particular focus on the pharmaceutical sector. We provide a complete welfare analysis that accounts for both global investment decisions in R&D as well as local costly distribution of drugs. We study the patent holder’s decisions when a foreign government can introduce a direct price control to lower the price of patented drugs. We show that, under parallel trade, investment can rise only when the foreign government takes into full account its impact both on investment and on the firm’s decision to supply the regulated country. This arises because of a complete withdrawal from price regulation. The regulated country is however better off under an intermediate form of commitment whereby the foreign government anticipates its effect only on local distribution and delivery, but not on global R&D investment. In this case, the government resorts to some price regulation, which reduces investment in particular under parallel trade.

Suggested Citation

  • Anna Rita Bennato & Tommaso Valletti, 2012. "Pharmaceutical Innovation and Parallel Trade," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2012-09, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:ueaccp:2012_09
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    References listed on IDEAS

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    Cited by:

    1. Laura Birg, 2023. "Pharmaceutical regulation under market integration through parallel trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1322-1346, November.
    2. Giorgio Matteucci & Pierfrancesco Reverberi, 2017. "Drug innovation, price controls, and parallel trade," International Journal of Health Economics and Management, Springer, vol. 17(2), pages 159-179, June.
    3. 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.
    4. Reisinger, Markus & Saurí, Lluís & Zenger, Hans, 2019. "Parallel imports, price controls, and innovation," Journal of Health Economics, Elsevier, vol. 66(C), pages 163-179.
    5. Laura Birg, 2023. "Parallel imports under a manufacturer rebate and a price freeze: Evidence from Germany," Health Economics, John Wiley & Sons, Ltd., vol. 32(2), pages 302-323, February.
    6. Foad Iravani & Hamed Mamani & Emisa Nategh, 2020. "External Reference Pricing and Parallel Imports of Pharmaceuticals: A Policy Comparison," Production and Operations Management, Production and Operations Management Society, vol. 29(12), pages 2716-2735, December.
    7. Kamal Saggi, 2016. "Trade, Intellectual Property Rights, and the World Trade Organization," Vanderbilt University Department of Economics Working Papers 16-00014, Vanderbilt University Department of Economics.
    8. 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.
    9. Birg, Laura, 2019. "Price Caps versus Reimbursement Limits: Pharmaceutical Regulation under Market Integration through Parallel Trade," University of Göttingen Working Papers in Economics 253, University of Goettingen, Department of Economics, revised 2019.
    10. Giorgio Matteucci & Pierfrancesco Reverberi, 2014. "Parallel trade, price regulation, and investment incentives," DIAG Technical Reports 2014-16, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    11. Birg, Laura, 2018. "Parallel Imports and Manufacturer Rebates," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181646, Verein für Socialpolitik / German Economic Association.
    12. Giorgio Gnecco & Berna Tuncay & Fabio Pammolli, 2018. "A Comparison of Game-Theoretic Models for Parallel Trade," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-57, September.
    13. Senra de Morais, Rafael Pinho, 2017. "Compulsory licensing of pharmaceuticals by the developing south," Economics Letters, Elsevier, vol. 161(C), pages 74-77.
    14. Li, Hai & Shao, Jing & Zhu, Stuart X., 2018. "Parallel importation in a supply Chain: The impact of gray market structure," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 114(C), pages 220-241.
    15. Kyle, Margaret K., 2022. "Incentives for pharmaceutical innovation: What’s working, what’s lacking," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    16. Charitini Stavropoulou & Tommaso Valletti, 2015. "Compulsory licensing and access to drugs," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(1), pages 83-94, January.
    17. Shen Guo & Bin Hu & Hai Zhong, 2013. "Impact of parallel trade on pharmaceutical firm’s profits: rise or fall?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 14(2), pages 345-355, April.
    18. Dao-Zhi Zeng & Biyue Zhang, 2020. "Parallel imports in large developing countries," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 65(2), pages 509-525, October.

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    More about this item

    Keywords

    IPRs; parallel trade; pharmaceutical R&D; price regulation;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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