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Parallel imports of pharmaceutical products in the European Union

Author

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  • Ganslandt, Mattias
  • Maskus, Keith E.

Abstract

The point of parallel imports of pharmaceuticals is arbitrage between countries with different prices. For several years, an important issue in the European Union (EU) has been the evident conflict between differing price regulations in the member states, on the one hand, and the consequences of parallel trade, on the other. In the EU, so long as the manufacturer has placed the good on the market voluntarily, the principle of free movement of goods allows individuals, or firms within the EU to trade goods across borders, without the consent of the producer. In this context, the authors study the effects of parallel trade in the pharmaceutical industry. They develop a model in which an original manufacturer competes in its home market with parallel-importing firms. The two key hypotheses in their theoretical analysis are these: First, if the potential for parallel imports is unlimited, the manufacturer chooses deterrence, and international prices converge. Second, with endogenously limited arbitrage, the manufacturing firm accommodates, and the price in the home market falls as the volume of parallel trade rises. The authors test their hypotheses on data from the Swedish market for 1995-98. Before 1995, Sweden prohibited parallel imports of pharmaceutical products, but entry into the EU, on January 1, 1995, required Sweden to allow them. Simple empirical tests favor the accommodation hypothesis with a time lag. Using data from Sweden, the authors find that the prices of drugs, subject to competition from parallel imports increased less than those for other drugs between 1995 and 1998. Roughly, three-fourths of this effect can be attributed to the lower prices of parallel imports, and one-fourth to lower prices charged by the manufacturing firm. Econometric analysis finds that rents to parallel importers (or resource costs in parallel trade) could be more than the gain to consumers from lower prices.

Suggested Citation

  • Ganslandt, Mattias & Maskus, Keith E., 2001. "Parallel imports of pharmaceutical products in the European Union," Policy Research Working Paper Series 2630, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2630
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    References listed on IDEAS

    as
    1. Ganslandt, Mattias & Maskus, Keith E., 2001. "Parallel imports of pharmaceutical products in the European Union," Policy Research Working Paper Series 2630, The World Bank.
    2. Klepper, Gernot, 1992. "Pharmaceuticals - Who's Afraid of `1992'?," CEPR Discussion Papers 675, C.E.P.R. Discussion Papers.
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. Kristina M. Lybecker, 2008. "Keeping it real: anticounterfeiting strategies in the pharmaceutical industry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(5), pages 389-405.
    4. Steve Thompson, 2009. "Grey Power: An Empirical Investigation of the Impact of Parallel Imports on Market Prices," Journal of Industry, Competition and Trade, Springer, vol. 9(3), pages 219-232, September.
    5. Izabela Jelovac & Catalina Bordoy, 2005. "Pricing and Welfare Implications of Parallel Imports in the Pharmaceutical Industry," International Journal of Health Economics and Management, Springer, vol. 5(1), pages 5-21, January.
    6. Ganslandt, Mattias & Maskus, Keith E., 2004. "Parallel imports and the pricing of pharmaceutical products: evidence from the European Union," Journal of Health Economics, Elsevier, vol. 23(5), pages 1035-1057, September.
    7. 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.
    8. 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.
    9. Richard Friberg, 2003. "Common Currency, Common Market?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 650-661, 04/05.
    10. Stähler, Frank & Maskus, Keith, 2013. "Retailers as Agents and the Absence of Parallel Trade," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79737, Verein für Socialpolitik / German Economic Association.
    11. Ganslandt, Mattias & Maskus, Keith E., 2001. "Parallel imports of pharmaceutical products in the European Union," Policy Research Working Paper Series 2630, The World Bank.
    12. Bordoy, Catalina & Jelovac, Izabela, 2003. "Pricing and Welfare of Parallel Imports in the Pharmaceutical Industry," Research Memorandum 004, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
    13. 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.

    More about this item

    Keywords

    Community Development and Empowerment; Montreal Protocol; General Technology; Information Technology; Public Health Promotion; Markets and Market Access; Access to Markets; Environmental Economics&Policies; Economic Theory&Research; Consumption;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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