Income Distribution, Parallel Imports and Innovations in Health Care Markets

Abstract

This paper examines the implications of parallel trade for the level of innovations in health care market, the price of the innovated drug and for welfare levels of the Third and the Rich world. We have shown in terms of a very simple analytical framework that regardless of intra country differences, parallel imports results in lower level of health-care innovation but, contrary to popular as well as conventional theoretical wisdom, lower price in the third world compared to market-based discrimination. Despite such lower price, however, parallel imports unambiguously makes all buyers in the Third world worse off when intra-country income disparity exist. The only gainers from parallel imports appear to be the buyers in the rich world.

Keywords: Parallel Imports, Price Discrimination, Health-Care Innovation, Market Size, Income Distribution

JEL Classification: F13, I11, O34