The Welfare Impact of Parallel Imports: A Structural Approach Applied to the German Market for Oral Anti-diabetics

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Date and Time: 
Tuesday, March 10, 2015
12:00 pm – 1:00 pm
Speaker: 
Moritz Suppliet
Düsseldorf Institute for Competition Economics (DICE), Heinrich Heine University
Abstract: 

We investigate the welfare impact of parallel imports using a large panel dataset containing monthly information on sales, ex-factory prices, and further product characteristics for all 649 anti-diabetic drugs sold in Germany between 2004 and 2010. We estimate a two-stage nested logit model of demand, and on the basis of an oligopolistic model of multi-product firms, we then recover the marginal costs and markups. We finally evaluate the effect of the parallel imports' policy by calculating a counterfactual scenario without parallel trade. According to our estimates, parallel imports reduce the prices for patented drugs by 11% and do not have a significant effect on prices for generic drugs. This amounts to an increase in the demand-side surplus by €19 million per year (or €130 million in total), which is relatively small compared with the average annual market size of around €227 million based on ex-factory prices. The variable profits for the manufacturers of original drugs from the German market are reduced by €18 million (or 37%) per year when parallel trade is allowed, yet only one third of this difference is appropriated by the importers.