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

67 Pages Posted: 29 Jan 2018 Last revised: 4 Oct 2019

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 access through parallel imports. For prescription drugs under

patent, parallel trade affects 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, thus foreclosing consumers' access to less profitable drugs. This allows retailers

to bargain and obtain lower wholesale prices from the manufacturer and parallel trader. With detailed

transaction data from Norway, we identify a demand model with unobserved choice sets using retail-side

conditions for optimal assortment decisions of pharmacies. We find that retailer incentives play a

significant role in fostering parallel trade penetration and that banning parallel imports would benefit

manufacturers as well as prevent pharmacies from foreclosing the manufacturer's product. Finally, in the

case of the statin market in Norway, we show that it would be possible to decrease spending and increase

profits of the original manufacturer through lump sum transfers associated with a lower reimbursement

price, thus decreasing price differentiation across countries.

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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