Price Regulation and Parallel Imports of Pharmaceuticals

46 Pages Posted: 23 Jan 2014

See all articles by Kurt Richard Brekke

Kurt Richard Brekke

Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Tor Helge Holmas

University of Bergen - Department of Economics

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2014

Abstract

This paper studies the effects of price regulation and parallel imports in the on-patent pharmaceutical market. First, we develop a theory model in which a pharmacy negotiates producer prices with a brand-name …firm and then sets retail prices. We show that the effects of price regulation crucially depend on whether the producer faces competition from parallel imports. While parallel imports improve the bargaining position of the pharmacy, price regulation counteracts this effect and may even be pro…table for the producer. Second, we use a unique dataset with information on sales and prices at both producer and retail level for 165 substances over four years (2004-7). Exploiting exogenous variation in the regulated price caps, we show that stricter price regulation reduces competition from parallel imports. While the effect is clearly negative on producer pro…ts for substances without parallel imports, the effect is not signi…ficant for substances with parallel imports. Finally, we show that stricter price regulation reduces total expenditures, but the effect is much stronger for substances with parallel import. Thus, our results suggest that price regulation may promote both static and dynamic efficiency in the presence of parallel imports.

Keywords: Pharmaceutical market; Price regulation; Parallel imports

JEL Classification: I11; I18; L13; L51; L65

Suggested Citation

Brekke, Kurt Richard and Holmas, Tor Helge and Straume, Odd Rune, Price Regulation and Parallel Imports of Pharmaceuticals (January 10, 2014). NHH Dept. of Economics Discussion Paper No. 01/2014, Available at SSRN: https://ssrn.com/abstract=2382589 or http://dx.doi.org/10.2139/ssrn.2382589

Kurt Richard Brekke (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Tor Helge Holmas

University of Bergen - Department of Economics ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway
+47 55589238 (Phone)
+47 55589210 (Fax)

HOME PAGE: http://www.econ.uib.no/stab/torHelge.html

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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