Wednesday, November 15, 2017 at 11:40am to 1:10pm
Uris Hall, 498
Toulouse School of Economics
On the Role of Parallel Trade on Manufacturers and Retailers Profits in the Pharmaceutical Sector (joint w/Morten Saethre)
Abstract: Differences in regulated pharmaceutical prices within the European Economic Area can be exploited by pharmacy retailers using parallel imports. Such provision decisions affect the sharing of profits in markets for prescription drugs, including the profitability of innovating pharmaceutical companies before patent expiry, when parallel trade is the unique source of upstream competition. We develop a structural model of demand and supply where retailers can alter the set of goods which the consumer can choose from, thus foreclosing the access to some drugs, in response to differences in profitability across products. With detailed transaction data, we identify a demand model with unobserved choice sets using supply side conditions for optimal assortment decisions of pharmacies. Estimating our model with rich data on a pharmaceutical market featuring parallel imports, we find that retailer incentives play a significant role in fostering parallel trade penetration. Our counterfactual simulations show that the parallel imports of drugs has large implications for the distribution of industry profits. In particular, retailers gain at the expense of pharmaceutical companies, while parallel traders also gain but more modest profits. Finally, a policy preventing pharmacies to foreclose the direct imports is shown to shift partially profits from pharmacists to both parallel traders and producers, and diminishing the regulated retail price favors even more the producer.