Parallel imports, price controls, and innovation
Lluís Saurí and
Journal of Health Economics, 2019, vol. 66, issue C, 163-179
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 (search for similar items in EconPapers)
JEL-codes: F13 I18 L12 O31 O34 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:66:y:2019:i:c:p:163-179
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