Externalities of National Pharmaceutical Policy when Markets are Integrated through Parallel Trade

Abstract

This paper studies externalities of nationally determined cost-sharing systems, in particular coinsurance rates, under pharmaceutical parallel trade in a two-country model with a vertical distributor relationship. Parallel trade generates a price-decreasing competition effect in the destination country of the parallel import and a price-increasing double marginalization effect in the source country. An increase of the coinsurance rate in the destination country mitigates the double marginalization effect in the source country. An increase of the coinsurance rate in the source country reinforces the competition effect in the destination country. This may be a case for policy coordination in the European Union.