Global Welfare Effects of a Uniform Pricing Parallel Trade-Preventing Strategy: An Analysis Through Quadratic and Maximin Programming
Posted: 23 Sep 2015
Date Written: April 22, 2015
Parallel trade refers to the arbitrage opportunity created when the same product is sold in at least two different markets, which may vary in prices and/or reimbursement regulations. When allowed to policymakers, this practice may damage the manufacturers, representing a threat to their investments in research and development. As a consequence, parallel trade-preventing strategies have been proposed in the literature. In the paper, we focus on one such strategy (more precisely, a uniform pricing one) for a two country model of trade of pharmaceuticals, evaluating its loss of efficiency with respect to the optimal value of the global welfare obtained by a hypothetical global planner, using three different models for the global welfare itself, and finding the optimal decisions by solving suitable quadratic and maximum optimization problems. Then focusing on one such model, we study the dependence of the loss of efficiency on the relative market size , the total fixed cost of production associated with research and development, and the marginal cost of production. Differently from previous literature, the inclusion in the model of the total fixed cost of production makes it possible to highlight in the analysis when there is an incentive for the manufacturer to do research and development. Extensions of the analysis to game-theoretic models are also briefly discussed.
Keywords: Noncooperative game theory; subgame-perfect Nash equilibrium, price of anarchy, quadratic and maximin programming, parallel trade
JEL Classification: HB
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