Externalities of National Pharmaceutical Policy when Markets are Integrated through Parallel Trade

Abstract

This paper studies externalities of nationally determined cost-sharing systems, in particular coinsurance rates (patients pay a percentage of the price), under pharmaceutical parallel trade in a two-country model with a vertical distributor relationship. Parallel trade generates a price-decreasing competition effect in the destination country and a price-increasing double marginalization effect in the source country. An increase of the coinsurance rates in the destination country of the parallel import mitigates the double marginalization effect in the source country. An increase of the coinsurance rate in the source country reinforces the competition effect in the destination country. This may be a case for policy coordination in the European Union.

Keywords: externalities, spillovers, parallel trade, cost-sharing, coinsurance rates

JEL Classification: F12, I11, I18