Another Side of Parallel Trade on Pharmaceuticals: Price, Supply and Social Welfare in the Exporting Country

In recent years, there are growing concerns on the issue of parallel trade on pharmaceuticals. It is an existing issue in European Union and an emerging issue in the North America and Asia. In the existing studies, the attentions are mainly focused on the price and social welfare in the importing country. If parallel trade was legally permitted, what would happen in the exporting country is also an important issue. In this paper, a model is developed to explore the drug price, supply and social welfare in both the exporting country and importing country in the presence of parallel trade. The possible policy reactions of the government in the two countries are also discussed. Parallel trade will lead to a higher drug price and then a social welfare loss in the exporting country; under certain circumstances, the pharmaceutical firm may cut off the drug supply, which leads to a net welfare loss to the exporting country. The firm’s total profit and social welfare in the importing country may increase or decrease. The later finding is contradicted to an existing study because of the relaxation on some assumptions. The results show that the negotiated price in the presence of parallel trade is sensitive to the market size of the drug and transaction cost of parallel trade. Therefore, those factors have important policy implications to the policy maker in the exporting country. With proper policy reactions, the social welfare loss could be avoided. For the importing country, the social welfare change when parallel trade is legally permitted is closely related to the firm’s bargaining power in the foreign market. That should be considered by the policy maker