Mueller-Langer, Frank (2010): An analysis of the ambiguous welfare effects of parallel trade freedom.
Download (319kB) | Preview
The regulation of parallel trade has become a critical issue in the global trading system, as the welfare effects of parallel trade freedom are generally ambiguous. In this paper we investigate the welfare effects of parallel trade freedom for low, intermediate, and high trade costs and different levels of market size. By analyzing a game played between a domestic monopolistic manufacturer of pharmaceuticals and a foreign exclusive distributor we, first, show that parallel trade reduces the profit of the manufacturer and his incentives to invest in R&D. In addition to this first finding, we show, secondly, that the question as to whether parallel trade freedom has positive or negative welfare properties depends on the level of trade cost and the heterogeneity of countries in terms of market size. In particular, we find that parallel trade freedom has a positive effect on global welfare if countries are sufficiently heterogeneous in terms of market size and if trade costs are intermediate and low, respectively. Surprisingly, this result even holds in a situation where parallel trade freedom implies the closure of the smaller market. If, however, countries are virtually homogenous in terms of market size, parallel trade freedom may be detrimental to global welfare for specific levels of trade costs.
|Item Type:||MPRA Paper|
|Original Title:||An analysis of the ambiguous welfare effects of parallel trade freedom|
|Keywords:||Parallel Trade; Welfare Effects; Pharmaceuticals; Intellectual Property Rights|
|Subjects:||L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development; Intellectual Property Rights > O34 - Intellectual Property Rights
F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies
L - Industrial Organization > L4 - Antitrust Issues and Policies > L43 - Legal Monopolies and Regulation or Deregulation
|Depositing User:||Frank Müller-Langer|
|Date Deposited:||20. Jul 2012 18:23|
|Last Modified:||14. Feb 2013 10:39|
Arfwedson, J. (2004), Parallel trade in pharmaceuticals, IPI Policy Report No. 182, Lewisville: Institute for Policy Innovation.
Barfield, C. E. and M. A. Groombridge (1998), "The economic case for copyright owner control over parallel imports", Journal of World Intellectual Property, 1(6), 903-939.
Barfield, C. E. and M. A. Groombridge (1999), "Parallel trade in the pharmaceutical industry: implications for innovation, consumer welfare, and health policy", Fordham Intellectual Property, Media and Entertainment Law Journal, 10(1), 185-266.
Brekke, K. R., A. L. Grasdal, and T. H. Holmås (2009), "Regulation and pricing of pharmaceuticals: reference pricing or cap regulation?", European Economic Review, 53, 170-185.
Chard, J. S. and C. J. Mellor (1989), "Intellectual property rights and parallel imports", World Economy, 12(1), 69-83.
Danzon, P. M. (1997), Pharmaceutical price regulation, Washington, D.C.: American Enterprise Institute Press.
Danzon, P. M. (1998), "The economics of parallel trade", PharmacoEconomics, 13(3), 293-304.
Danzon, P. M. and A. Towes (2003), "Differential pricing for pharmaceuticals: reconciling access, R&D and patents", International Journal of Health Care Finance and Economics, 3(3), 183-205.
Fink, C. (2005), "Entering the jungle of intellectual property rights exhaustion and parallel importation" in Fink C. and K. E. Maskus (ed.), Intellectual property and development: lessons from recent economic research, 171-188, World Bank and Oxford University Press.
Gallini, N. T. and A. Hollis (1999), "A contractual approach to the gray market", International Review of Law and Economics, 19(1), 1-21.
Ganslandt, M. and K. E. Maskus (2004), "Parallel imports and the pricing of pharmaceutical products: evidence from the European Union", Journal of Health Economics, 23(5), 1035-1057.
Grossman, G. M. and E. L.-C. Lai (2008), "Parallel imports and price controls", RAND Journal of Economics, 39(2), 378-402.
Harhoff, D. and M. Reitzig (2004), "Determinants of opposition against EPO patent grants - the case of biotechnology and pharmaceuticals", International Journal of Industrial Organization, 22(4), 443-480.
Harhoff, D., F. M. Scherer, and K. Vopel (2003), "Citations, family size, opposition and the value of patent rights", Research Policy, 32(8), 1343-1363.
Jelovac, I. and C. Bordoy (2005), "Pricing and welfare implications of parallel imports in the pharmaceutical industry", International Journal of Health Care Finance and Economics, 5(1), 5-21.
Li, C. and K. E. Maskus (2006), "The impact of parallel imports on investments in cost-reducing research and development", Journal of International Economics, 68(2), 443-455.
Li, C. and J. Robles (2007), "Product innovation and parallel trade", International Journal of Industrial Organization, 25, 417-429.
Malueg, D. A. and M. Schwartz (1994), "Parallel imports, demand dispersion, and international price discrimination", Journal of International Economics, 37(3/4), 167-195.
Mansfield, E. (1986), "Patents and innovation: an empirical study", Management Science, 32(2), 173-181.
Maskus, K. E. (2000a), Intellectual property rights in the global economy, Washington, DC: Institute for International Economics.
Maskus, K. E. (2000b), "Parallel imports", World Economy, 23(9), 1269-1284.
Maskus, K. E. (2001), Parallel imports in pharmaceuticals: implications for competition and prices in developing countries, Geneva: Final Report to the World Intellectual Property Organization.
Maskus, K. E. and Y. Chen (2004), "Vertical price control and parallel imports: theory and evidence", Review of International Economics, 12(4), 551-570.
Maskus, K. E. and M. Ganslandt (2002), "Parallel trade in pharmaceutical products: implications for procuring medicines for poor countries" in Granville, B. (ed.), The economics of essential medicines, 57-80, London: Royal Institute of International Affairs.
Müller-Langer, F. (2007), A game theoretic analysis of parallel trade and the pricing of pharmaceutical products, German Working Papers in Law and Economics, vol. 2007, art. 6, Berkeley Electronic Press.
Müller-Langer, F. (2009), Creating R&D incentives for medicines for neglected diseases: an economic analysis of parallel imports, patents, and alternative mechanisms to stimulate pharmaceutical research, Wiesbaden: Gabler.
Richardson, M. (2002), "An elementary proposition concerning parallel imports", Journal of International Economics, 56(1), 233-245.
Szymanski, S. and T. M. Valletti (2005), "Parallel trade, price discrimination, investment and price caps", Economic Policy, 20(44), 705-749.
Valletti, T. M. (2006), "Differential pricing, parallel trade, and the incentive to invest", Journal of International Economics, 7(1), 314-324.
Valletti, T. M. and S. Szymanski (2006), "Parallel trade, international exhaustion and intellectual property rights: a welfare analysis", Journal of Industrial Economics, 54(4), 499-526.
Varian, H. R. (1985), "Price discrimination and social welfare", American Economic Review, 75(4), 870-875.