Should the U.S. Allow Prescription Drug Reimports from Canada?

Abstract

As a result of public outrage over lower prescription drug prices in Canada, Congress passed legislation that would allow these drugs to be imported into the United States. The lower Canadian prices reflect price regulation. Opponents of allowing these imports have argued that the U.S. will import Canadian price controls and that profits of pharmaceutical companies will be hurt. In this paper, a model is developed in which a good sold in the foreign country is subject to a negotiated price which is determined in a Nash Bargaining game. When imports back into the home country are allowed, this negotiated price also becomes the domestic price. This causes the home firm to make fewer price concession in the Nash Bargaining game. Home firm profits are found to rise under the reimport regime for both of the demand functions analyzed in this paper.

Keywords: Prescription drugs, Reimports, price controls, Canada

JEL Classification: I18, F1