Working Paper: CEPR ID: DP12649
Authors: Pierre Dubois; Morten S. Stahre
Abstract: Differences in regulated pharmaceutical prices within the European Economic Area create arbitrageopportunities that pharmacy retailers can access through parallel imports. For prescription drugs underpatent, parallel trade affects the sharing of profits among an innovating pharmaceutical company, retailers,and parallel traders. We develop a structural model of demand and supply in which retailers can choosethe set of goods to sell, thus foreclosing consumers’ access to less profitable drugs. This allows retailersto bargain and obtain lower wholesale prices from the manufacturer and parallel trader. With detailedtransaction data from Norway, we identify a demand model with unobserved choice sets using retail-sideconditions for optimal assortment decisions of pharmacies. We find that retailer incentives play asignificant role in fostering parallel trade penetration and that banning parallel imports would benefitmanufacturers as well as prevent pharmacies from foreclosing the manufacturer’s product. Finally, in thecase of the statin market in Norway, we show that it would be possible to decrease spending and increaseprofits of the original manufacturer through lump sum transfers associated with a lower reimbursementprice, thus decreasing price differentiation across countries.
Keywords: parallel trade; pharmaceuticals; vertical contracts; demand estimation; foreclosure
JEL Codes: I11; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| parallel trade (F10) | sharing of profits among pharmaceutical manufacturers, retailers, and parallel traders (L42) |
| retailers restrict access to less profitable drugs (L42) | increase in bargaining power (C79) |
| increase in bargaining power (C79) | lower wholesale prices from manufacturers (L11) |
| retailer incentives (L81) | fostering parallel trade penetration (F10) |
| banning parallel imports (F13) | manufacturers benefit (L60) |
| banning parallel imports (F13) | pharmacies prevented from foreclosing manufacturers' products (L65) |
| decrease in reimbursement prices (E31) | reduced spending (H56) |
| decrease in reimbursement prices (E31) | increased profits for the original manufacturer (L15) |