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Abstract:
We develop a simple double marginalization model with complete information, in which
an original manufacturer of a pharmaceutical product faces potential competition from
parallel imports by a foreign exclusive distributor. The model suggests that parallel imports
will never occur in the sub-game perfect Nash equilibrium, as it will always be beneficial for
the manufacturer to monopolize the home country by undercutting the price of the reimported
pharmaceutical product. However, the question as to whether it is optimal for the
manufacturer to charge the monopoly price in the home country depends on the level of trade
costs and the level of heterogeneity of the two countries, in terms of market size and price
elasticity of demand.
For the purpose of further research, this paper suggests the introduction of asymmetric
information with regard to local demand functions, in order to explain why parallel trade may
actually occur in equilibrium.
