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

66 Pages Posted: 29 Jan 2018

See all articles by Pierre Dubois

Pierre Dubois

University of Toulouse 1 - Toulouse School of Economics (TSE)

Morten Sæthre

Norwegian School of Economics (NHH)

Date Written: January 2018

Abstract

Differences in regulated pharmaceutical prices within the European Economic Area create arbitrage opportunities that pharmacy retailers can use through parallel imports. For prescription drugs under patent, such provision decisions affect 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 to consumers, thus foreclosing the consumers' access to some less-profitable drugs, which allows retailers to bargain and obtain lower wholesale prices with the manufacturer and parallel trader. With detailed transaction data, we identify a demand model with unobserved choice sets using supply-side conditions for optimal assortment decisions of pharmacies. Estimating our model, we find that retailer incentives play a significant role in fostering parallel trade penetration. Our counterfactual simulations show that parallel imports of drugs allows retailers to gain profits at the expense of the manufacturer, whereas parallel traders also gain but earn more modest profits. Finally, a policy preventing pharmacies from foreclosing the manufacturer's product is demonstrated to partially shift profits from pharmacists to both the parallel trader and the manufacturer, and a reduction in the regulated retail price favors the manufacturer even more.

Keywords: Demand estimation, foreclosure, Parallel trade, pharmaceuticals, vertical contracts

JEL Classification: I11, L22

Suggested Citation

Dubois, Pierre and Sæthre, Morten, On the Effect of Parallel Trade on Manufacturers' and Retailers' Profits in the Pharmaceutical Sector (January 2018). CEPR Discussion Paper No. DP12649. Available at SSRN: https://ssrn.com/abstract=3112273

Pierre Dubois (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Morten Sæthre

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

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