Parallel Trade in Pharmaceuticals: The Impact on Welfare and Innovation
1 September 1992
By Dr. Richard Rapp and Dr. Richard Rozek
In this paper, the authors discuss four welfare-enhancing aspects of restricting parallel imports in more detail, with a special focus on the pharmaceutical industry. Although many industries are subject to one or more of these market situations described above, the pharmaceutical industry exhibits characteristics of all four. Therefore, the article's aim is to use the pharmaceutical industry as an example when explaining:
:: how restraining parallel imports may enhance economic welfare, drawing on the law and economics literature on nonprice vertical restraints
:: the benefits of differential pricing in terms of expanding output and, possibly, reducing prices in all markets--as compared to a uniform price regime--in situations where firms incur high costs to develop a product prior to marketing
:: how parallel imports help to sustain monopsony power where it is found to exist
:: the long-run impact of prohibiting parallel imports on the incentives for innovation
Finally, the authors summarize their conclusions in a non-technical manner.
This paper was published in Journal of Economic Integration, Vol. 7, No. 2, Autumn 1992.
A reprint of this article is available from the authors upon request.
