Institute for foreign studies Kobe city university of foreign studies
Abstract
This paper examines how the parallel trade influences the pharmaceutical innovation and welfare. We consider the case where one monopolist in the home potentially sells in the both domestic and foreign markets with different price elasticities of demand. As relevant in the pharmaceutical context, the price of a good sold in the foreign country is determined by the negotiation between the firm and the foreign government. When the parallel trade is allowed, this negotiated foreign price also becomes the domestic price and thus the firm cannot set different price in each market. This paper shows that the parallel trade may enhance pharmaceutical innovation, when the bargaining power of the foreign government is strong and the price elsticity of demand in the foreign market is small