Parallel Imports, Price Controls, and Innovation
46 Pages Posted: 4 Aug 2018 Last revised: 14 Jun 2019
Date Written: April 1, 2019
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
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