Price Regulation and Parallel Imports of Pharmaceuticals

This paper studies the effects of price regulation and parallel imports in the on-patent pharmaceutical market. First, we develop a theory model in which a pharmacy negotiates producer prices with a brand-name fi…rm and then sets retail prices. We show that the effects of price regulation crucially depend on whether the producer faces competition from parallel imports. While parallel imports improve the bargaining position of the pharmacy, price regulation counteracts this effect and may even be pro…fitable for the producer. Second, we use a unique dataset with information on sales and prices at both producer and retail level for 165 substances over four years (2004-7). Exploiting exogenous variation in the regulated price caps, we show that stricter price regulation reduces competition from parallel imports. While the effect is clearly negative on producer profi…ts for substances without parallel imports, the effect is not signifi…cant for substances with parallel imports. Finally, we show that stricter price regulation reduces total expenditures, but the effect is much stronger for substances with parallel import. Thus, our results suggest that price regulation may promote both static and dynamic efficiency in the presence of parallel imports.