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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.