A model of parallel imports of pharmaceuticals with endogenous price controls

A model is developed to explore the behavior of an original manufacturer with a patent in response to a policy that permits parallel import competition from a country with price controls on the patented good. The model suggests that a manufacturer will limit its supply to the PI-exporting market. The home price is lower only under certain conditions. The relative size of the home market to the potential volume of PIs is a key determinant of the manufacturer's decision to accommodate competition or deter it. Whether the firm accommodates or deters competition, profits fall.