Parallel Importation of Pharmaceuticals

Abstract

National policy regarding parallel importation determines whether prices for a good protected by intellectual property rights are set in a segmented national market or in a larger international market. The innovative pharmaceutical industry has a cost structure which depends on patents and other intellectual property rights in order to recover the large sunk costs of research and development; parallel imports affect the ability of pharmaceutical firms to recover those costs. After discussing the international political context of parallel importation policy, international price differences, which create and are in turn affected by the possibility of parallel importation, are examined. Prices of name-brand pharmaceutical products are found to vary from the ideal of proportionality with income for several reasons, among them income inequality within a country. Applying simple theoretical assumptions about how prices are affected by the possibility of parallel importation, conditions are described under which allowing parallel importation can bring about price moderation. In other instances, parallel importation can have harmful external effects without bringing any benefit.