Working Paper No. 05-09
A Model of Parallel Imports of Pharmaceuticals
With Endogenous Price Controls
Katherine M. Sauer
United States policymakers are considering legislation which would allow parallel imports (PIs) of brand-name pharmaceuticals from Canada. I develop a model which explores the behavior of an original manufacturer in response to a policy permitting PI competition. The model suggests that a manufacturer will limit its supply to the exporting market. When the volume of PIs is small relative to the home market, the firm will accommodate a limited volume of competition. The price in the home market is decreasing as the volume of PIs increases. When the volume of PIs is large relative to the home market, the firm will deter PI competition completely through a severe supply limit. The price in the home market will be unchanged. Whether the firm accommodates or deters competition, profits fall.
JEL classification: F12; I18
Keywords: Parallel imports, Price controls, Pharmaceutical products