Drug innovation, price controls, and parallel trade

Giorgio Matteucci and Pierfrancesco Reverberi ()
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Giorgio Matteucci: Sapienza – Università di Roma
Pierfrancesco Reverberi: Sapienza – Università di Roma

International Journal of Health Economics and Management, 2017, vol. 17, issue 2, No 3, 159-179

Abstract: Abstract We study the long-run welfare effects of parallel trade (PT) in pharmaceuticals. We develop a two-country model of PT with endogenous quality, where the pharmaceutical firm negotiates the price of the drug with the government in the foreign country. We show that, even though the foreign government does not consider global R&D costs, (the threat of) PT improves the quality of the drug as long as the foreign consumers’ valuation of quality is high enough. We find that the firm’s short-run profit may be higher when PT is allowed. Nonetheless, this is neither necessary nor sufficient for improving drug quality in the long run. We also show that improving drug quality is a sufficient condition for PT to increase global welfare. Finally, we show that, when PT is allowed, drug quality may be higher with than without price controls.

Keywords: Parallel trade; Price controls; R&D investment; Prescription drugs; Intellectual property rights (search for similar items in EconPapers)
JEL-codes: F13 I18 L12 L51 O34 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10754-016-9205-5

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