Welfare and research and development incentive effects of uniform and differential pricing schemes

This paper is about the application of optimization methods to the analysis of three pricing schemes adopted by one manufacturer in a two-country model of production and trade. The analysis focuses on pricing schemes—one uniform pricing scheme, and two differential pricing schemes—for which there is no competition coming from the so-called parallel trade. This term denotes the practice of buying a patented product like a medicine in one market at one price, then re-selling it in a second so-called gray market at a higher price, on a parallel distribution chain where it competes with the official distribution chain. The adoption of pricing schemes under which parallel trade does not arise can prevent the occurrence of its well-documented negative effects. In the work, a comparison of the optimal solutions to the optimization problems modeling the three pricing schemes is performed. More specifically, conditions are found under which the two differential pricing schemes are more desirable from several points of view (e.g., incentive for the manufacturer to do Research and Development, product accessibility, global welfare) than the uniform pricing scheme. In particular, we prove that, compared to the uniform pricing scheme, the two differential pricing schemes increase the incentive for the manufacturer to invest in Research and Development. We also prove that they serve both countries under a larger range of values for the relative market size, making the product more accessible to consumers in the lower price country. Moreover, we provide a sufficient condition under which price discrimination is more efficient from a global welfare perspective than uniform pricing. The analysis applies in particular to the case of the European Single Market for medicines. Compared to other studies, our work takes into account also the possible presence in all the optimization problems of a positive constant marginal cost of production, showing that it can have non-negligible effects on the results of the analysis. As an important contribution, indeed, our analysis clarifies the conditions—which have been overlooked in the literature about the mechanisms adopted to prevent parallel trade occurrence—that allow/do not allow one to neglect the presence of this factor. Such conditions are related, e.g., to the comparison between the positive constant marginal cost of production, the parallel trade cost per-unit, and the maximal price that can be effectively charged to the consumers in the lower price country.

On the Effect of Parallel Trade on Manufacturers' and Retailers' Profits in the Pharmaceutical Sector

Differences in regulated pharmaceutical prices within the European Economic Area create arbitrage opportunities that pharmacy retailers can access through parallel imports. For prescription drugs under patent, parallel trade affects the sharing of profits among an innovating pharmaceutical company, retailers, and parallel traders. We develop a structural model of demand and supply in which retailers can choose the set of goods to sell, thus foreclosing consumers' access to less profitable drugs. This allows retailers to bargain and obtain lower wholesale prices from the manufacturer and parallel trader. With detailed transaction data from Norway, we identify a demand model with unobserved choice sets using retail‐side conditions for optimal assortment decisions of pharmacies. We find that retailer incentives play a significant role in fostering parallel trade penetration and that banning parallel imports would benefit manufacturers as well as prevent pharmacies from foreclosing the manufacturer's product. Finally, in the case of the statin market in Norway, we show that it would be possible to decrease spending and increase profits of the original manufacturer through lump sum transfers associated with a lower reimbursement price, thus decreasing price differentiation across countries.

11. Vertical Agreements

This chapter, which discusses EU competition policy towards vertical agreements, begins by outlining the choices available to a supplier when deciding how best to market and sell its products or services to customers, and the impact that the competition rules may have on a supplier's choice, including the treatment of agency agreements. It then discusses the EU approach to vertical agreements, in the light of the Commission’s Verticals Guidelines of 2010, including exclusive dealing, single branding, franchising andselective distribution agreements, and the review of the 2010 regime. It considers the importance in EU law of parallel trade between Member States and how this has influenced policy towards vertical restraints. It analyses the application of Article 101(1) and Article 101(3) to vertical agreements, including the Verticals block exemption of 2010; sub-contracting agreements; and the possible application of Article 102 to distribution agreements.