Working Paper: NBER ID: w12968
Authors: Margaret K. Kyle
Abstract: This paper examines how pharmaceutical firms have responded to changes in intellectual property rights and trade barriers that legalized "parallel imports" within the European Union. The threat of arbitrage by parallel traders reduces the ability of firms to price discriminate across countries. Due to regulations on price and antitrust law on rationing supply, pharmaceutical firms may rely on non-price responses. Such responses include differentiation of products across countries and selective "culling" of product lines to reduce arbitrage opportunities, as well as raising arbitrageurs' costs through choice of packaging. Using a dataset of drug prices and sales from 1993-2004 covering 30 countries, I find evidence that the behavior of pharmaceutical firms in the EU with respect to their product portfolios is consistent with attempts to reduce parallel trade. This may at least partially explain why parallel trade has not yet resulted in significant price convergence across EU countries. Accounting for non-price strategic responses may therefore be important in assessing the welfare effects of parallel imports.
Keywords: Pharmaceuticals; Parallel Trade; Intellectual Property; Price Discrimination
JEL Codes: D21; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legalization of parallel imports (F10) | Reduction in ability to price discriminate (D43) |
| Reduction in ability to price discriminate (D43) | Strategic responses of firms (product differentiation) (L21) |
| Legalization of parallel imports (F10) | Strategic responses of firms (product differentiation) (L21) |
| Strategic responses of firms (product differentiation) (L21) | Selective culling of product lines (L68) |
| Legalization of parallel imports (F10) | Altering packaging to raise costs for parallel traders (F12) |
| Strategic responses of firms (product differentiation) (L21) | Nonprice strategic responses (D49) |