Global Welfare Effects of a Uniform Pricing Parallel Trade-Preventing Strategy: An Analysis Through Quadratic and Maximin Programming

Posted: 23 Sep 2015

See all articles by Gnecco Giorgio

Gnecco Giorgio

IMT Institute for Advanced Studies

Fabio Pammolli

Polytechnic University of Milan - Department of Management, Economics and Industrial Engineering; CERM Foundation

Berna Tuncay

IMT Institute for Advanced Studies

Date Written: April 22, 2015

Abstract

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

Suggested Citation

Giorgio, Gnecco and Pammolli, Fabio and Tuncay, Berna, Global Welfare Effects of a Uniform Pricing Parallel Trade-Preventing Strategy: An Analysis Through Quadratic and Maximin Programming (April 22, 2015). Available at SSRN: https://ssrn.com/abstract=2664212

Gnecco Giorgio

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

Fabio Pammolli (Contact Author)

Polytechnic University of Milan - Department of Management, Economics and Industrial Engineering ( email )

Via Lambruschini 4C - building 26/A
Milano, 20156
Italy

CERM Foundation ( email )

Via Fiorentina, 1
Siena, Siena 53100
Italy

HOME PAGE: http://www.cermlab.it

Berna Tuncay

IMT Institute for Advanced Studies ( email )

Piazza San Ponziano 6
Lucca, 55100
Italy

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