Article

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

Pierre Dubois, and Morten Sæthre

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 retailside 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

Parallel trade; pharmaceuticals; vertical contracts; demand estimation; foreclosure;

Replaces

Pierre Dubois, and Morten Saethre, On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector, TSE Working Paper, n. 18-883, January 2018, revised March 2020.

Reference

Pierre Dubois, and Morten Sæthre, On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector, Econometrica, 2020, forthcoming.

Published in

Econometrica, 2020, forthcoming