Parallel Imports, Price Controls, and Innovation

46 Pages Posted: 4 Aug 2018 Last revised: 14 Jun 2019

See all articles by Markus Reisinger

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department; CESifo (Center for Economic Studies and Ifo Institute)

Lluís Saurí Romero

European Union - Directorate General for Competition

Hans Zenger

European Union - Directorate General for Competition

Date Written: April 1, 2019

Abstract

The impact of parallel trade on innovation in R&D-intensive industries, such as pharmaceuticals, is a hotly debated question in antitrust and IP policy. The well known argument that parallel trade dampens innovation by undermining firms’ ability to price discriminate has been challenged by recent literature. The argument is that with endogenous price controls, parallel trade increases innovation by reducing governments’ incentives to set particularly low price caps. In this paper, we show that this result crucially depends on the degree of homogeneity of the trading countries. The result only holds if consumers in poorer countries have a relatively similar demand for medication as consumers in richer countries. Instead, when countries are relatively heterogeneous, parallel trade dampens innovation and lowers welfare by exporting price cap regulation from poorer to richer countries. These findings are in line with recent case evidence. We also show that when patent length is endogenous, richer countries will tend to choose longer patent protection with parallel trade,whereas equilibrium price caps tend to be tighter in that case.

Keywords: Pharmaceutical Innovation, Parallel Imports, Price Regulation, Research & Development, Patent Length

JEL Classification: F13, I18, L12, O31, O34

Suggested Citation

Reisinger, Markus and Saurí Romero, Lluís and Zenger, Hans, Parallel Imports, Price Controls, and Innovation (April 1, 2019). Journal of Health Economics, Vol. 66, pp. 163-179, 2019. Available at SSRN: https://ssrn.com/abstract=3225128 or http://dx.doi.org/10.2139/ssrn.3225128

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Lluís Saurí Romero

European Union - Directorate General for Competition ( email )

Place Madou, Madouplein 1
Saint-Josse-ten-Noode/Sint-Joost-ten-Noode
Brussels, B-1049
Belgium

Hans Zenger (Contact Author)

European Union - Directorate General for Competition ( email )

Place Madou, Madouplein 1
Saint-Josse-ten-Noode/Sint-Joost-ten-Noode
Brussels, B-1049
Belgium

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