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On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector

Dubois, Pierre and Saethre, Morten (2018) On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector. TSE Working Paper, n. 18-883, Toulouse

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Official URL: http://tse-fr.eu/pub/32393

Abstract

Differences in regulated pharmaceutical prices within the European Economic Area create arbitrage opportunities that pharmacy retailers can access through parallel imports. For prescription drugs under patent, 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 choose
the set of goods to sell, thus foreclosing consumers’ access to less profitable drugs. This allows retailers to bargain and obtain lower wholesale prices from the manufacturer and parallel trader. With detailed transaction data from Norway, we identify a demand model with unobserved choice sets using retailside conditions for optimal assortment decisions of pharmacies. We find that retailer incentives play a significant role in fostering parallel trade penetration and that banning parallel imports would benefit manufacturers as well as prevent pharmacies from foreclosing the manufacturer’s product. Finally, in the case of the statin market in Norway, we show that it would be possible to decrease spending and increase profits of the original manufacturer through lump sum transfers associated with a lower reimbursement price, thus decreasing price differentiation across countries

Item Type: Monograph (Working Paper)
Language: English
Date: January 2018
Place of Publication: Toulouse
Uncontrolled Keywords: Parallel trade, pharmaceuticals, vertical contracts, demand estimation, foreclosure
JEL codes: I11 - Analysis of Health Care Markets
L22 - Firm Organization and Market Structure - Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 24 Apr 2018 09:05
Last Modified: 30 Aug 2019 07:49
OAI ID: oai:tse-fr.eu:32393
URI: http://publications.ut-capitole.fr/id/eprint/25818

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