Parallel Trade and Pharmaceutical Prices: A Game-theoretic Approach and Empirical Evidence from the European Union

Sotiris Vandoros and Panos Kanavos

The World Economy, 2014, vol. 37, issue 6, 856-880

Abstract: type="main" xml:id="twec12063-abs-0001" xml:lang="en">

This paper studies whether parallel traded products spark price competition in pharmaceutical markets and whether they are any cheaper than locally sourced products. We follow a game-theoretic approach and employ descriptive statistics and econometric methods to study the effects of parallel trade on competition from a theoretic and empirical perspective. The theoretic approach suggests that there is a unique Nash equilibrium, and the parallel trader sets prices at the same level as the locally sourced product, while the price of the latter remains unaffected by parallel trade. However, there may be deviations from this equilibrium in the presence of particular policies or generic competition, in which case the parallel traded product may be priced at lower levels than the locally sourced product. Empirical analysis confirms the predictions of the theory. Descriptive statistics show that there is no gap between locally sourced and parallel traded products, unless generics or policies encouraging parallel trade are present. Results of the econometric analysis show that parallel trade does not trigger price competition and that the price of the locally sourced product remains unaffected by parallel trade. Therefore, any savings for health insurance occurring as a result of parallel trade are limited.

Date: 2014
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