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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|19835||2012||15 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of International Economics, Volume 87, Issue 2, July 2012, Pages 262–276
In a North–South vertically differentiated duopoly we analyze (i) the effects of parallel import (PI) policies on price competition and (ii) the interdependence of national PI policies. Prices can be higher in the North if both countries permit PIs relative to when only the South does. If governments maximize national welfare and demand asymmetry across countries is sufficiently large, the North forbids PIs to ensure its firm sells in the South and international price discrimination — the South's most preferred market outcome — obtains. When demand structures are relatively similar across countries, the North permits PIs and uniform pricing — its most preferred outcome — results.
Parallel trade is said to occur when a product protected by some form of intellectual property right (IPR) offered for sale by the rights holder in one country is re-sold in another country without the right holder's consent. As is clear, the incentive to engage in such trade naturally arises in the presence of significant international price differences, which in turn often reflect the underlying market power of sellers (Scherer and Watal, 2002). The possibility of parallel trade affects firm behavior and pricing in many markets, perhaps the most important of which is the market for pharmaceuticals.2 A recent article published in the Financial Times noted that several billion dollars of parallel trade in pharmaceuticals occurs within the European Union (EU) annually and that such trade accounts for roughly 10% of Europe's medicine trade. 3 The biggest destination markets tend to be Germany, UK, Netherlands, Denmark, Sweden, Ireland, and Norway — some of the richest countries in Europe where prices generally tend to be the highest. As one might expect, the important parallel exporters are Greece and Spain — countries where prices of medicines are lower than the EU average. Kanavos et al. (2004) document the increased importance of PIs in the EU pharmaceutical market. They find that from 1997 to 2002, the share of PIs as a percentage of the total pharmaceutical market increased from under 2% to 10.1% in Sweden and from 1.7% to about 7% in Germany. On the export side, Greece's share of parallel exports increased from under 1% to 21.6% over the same time period. Impressive as these figures are, it is worth emphasizing that the observed flows of parallel trade need not be large for PI policies to matter because firms will tend to make different pricing decisions when such trade is permitted relative to when it is not. 4 Discussions regarding PI policies tend to be quite charged in the context of pharmaceuticals and perhaps for a good reason. The issue has often been heavily politicized in most countries, including the United States where it has been debated repeatedly over the years in Congress. For example, an article published in the Wall Street Journal on Dec 16, 2009 reported that a measure to allow importation of prescription drugs from abroad fell short in the US Senate by just 9 votes. The bill was sponsored by Senator Byron Dorgan of North Dakota who argued that his motivation was to protect consumer interests since “…the American people are charged the highest prices in the World”. The pharmaceutical industry opposed the bill questioning the safety of imported drugs. While safety maybe a legitimate concern, there is little doubt that the primary issue for firms is the ability to maintain high prices in the United States. Goldberg (2010) has argued that the practice of “global reference pricing” on the part of some rich countries and the possibility of PIs can induce pharmaceutical multinationals to not serve low income countries and/or raise their prices (even above their optimal monopoly prices) in such markets — outcomes that emerge quite sharply in our model. For example, multinational firms frequently refrain from introducing new drugs in India because the foregone profits in the Indian market are trivial relative to the profits that would be lost in Canada and many European countries if Indian prices were used as a reference point by these countries while determining local prices (Goldberg, 2010). More generally, using data regarding drug launches in 68 countries between 1982 and 2002, Lanjouw (2005) shows that the presence of price regulations and global reference pricing in the industrialized world contributes to launch delay in developing countries. In a similar vein, Danzon and Epstein (2008) find that the delay effect of a prior launch in a high-price EU country on a subsequent launch in a low price EU country is substantially stronger than the corresponding effect of a prior launch in a low price EU country. Whether or not PIs can flow into a country is a matter of national policy. A country can choose to permit PIs by adopting the legal doctrine of international exhaustion of IPRs under which such rights are deemed to expire globally with the first sale of the relevant product, regardless of the geographical incidence of the sale. On the other hand, a country can effectively ban PIs by adopting national exhaustion of IPRs wherein rights are held to expire only in the market of first sale thereby leaving the right holder free to prevent its resale in other markets. While national laws pertaining to parallel trade are complex and multi-faceted, the following characterization broadly captures the global policy spectrum: the two largest markets in the world — i.e. United States and the EU — forbid PIs of patented and copyrighted goods from most other countries whereas developing countries tend to vary widely in their restraints on such imports ( Maskus, 2000). 5 This variation in national PI policies reflects unilateral policy decisions since presently there is no multilateral cooperation or consensus over policies pertaining to parallel trade. Indeed, the key multilateral agreement on IPRs — i.e. the WTO's Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) — leaves member countries free to implement PI policies of their choice. Given the lack of any multilateral consensus regarding the desirability of parallel trade, two important questions arise. First, how do national PI policies affect oligopolistic competition in global markets? Second, what is the nature of strategic interdependence between PI policies of individual countries? We address these questions in a North–South model in which the two regions differ with respect to their domestic demand structure and the quality of goods produced by their respective firms. In particular, the Northern firm's product is of high quality whereas that of the Southern firm is of low quality and market size as well as the relative preference for high quality is larger in the North. Not only do these stylized asymmetries capture empirically relevant differences between Northern and Southern markets, we show that they shed new light on the causes and consequence of parallel trade. Indeed, without properly accounting for such asymmetries, it is difficult to explain the observed variation in PI policies across countries. The timing of decisions in our model is as follows. First, governments simultaneously decide whether or not to permit PIs. Next, each firm chooses whether or not to offer its product for sale in the foreign market. Finally, given policies and market structure, firms compete in prices and international trade and consumption occur. To the best of our knowledge, ours is the first paper to provide an analysis of PI policies in a model that incorporates strategic interaction not only in the product market but also at the policy-setting stage. The existing literature on PIs has extensively explored uniform global pricing and international price discrimination by firms with market power. In addition to these symmetric market outcomes, an asymmetric scenario where the low quality sells in both markets while the high quality firm sells only in the North plays a crucial role in our analysis. Such an asymmetric market structure can arise in our model because the two firms have uneven export incentives: the lure of the lucrative Northern market is stronger than that of the Southern market. We find that the strategic price competition under such a market structure tends to be rather subtle. To gain further insight, suppose the North permits PIs while the South does not. Under such a policy configuration, if demand is relatively similar across countries the low quality firm charges its optimal monopoly price in the South while both firms charge their optimal discriminatory prices in the Northern market. However, if demand structure is sufficiently asymmetric across countries, the low quality firm's optimal monopoly price in the South is lower than its optimal discriminatory price for the Northern market. Under such a scenario, the North's openness to PIs induces the low quality firm to set a common international price that actually exceeds its optimal monopoly price for the Southern market: i.e. it tolerates a sub-optimally high price in the Southern market to charge a more attractive price in the Northern market ( Lemma 2). The resulting softening of price competition in the North, in turn, makes forsaking the Southern market more attractive for the Northern firm, because local demand for its product is relatively large. Indeed, we show that such an asymmetric market structure can arise not only when only one country permits PIs but also when both countries do so ( Proposition 2 and Proposition 3). Our policy analysis sheds new light on how heterogeneity in demand structure across countries determines national preferences for PI policies. We show that if governments maximize national welfare the North is more likely to permit PIs (i.e. it prefers to permit PIs over a larger parameter space) when the South does not do so. With its smaller market, the Southern government's influence on market structure tends to be weaker, something that is reflected in the nature of the policy equilibrium: if the North is open to PIs, the South also (weakly) prefers to be open to PIs whereas a Northern ban on PIs makes the South indifferent between its two policy options since it renders the Southern policy inconsequential for market structure. The subgame perfect equilibrium of our model (stated in Proposition 6) is as follows: when the degree of asymmetry between the two markets is high and each government maximizes its national welfare, the North forbids PIs and international price discrimination prevails; otherwise, it permits PIs and uniform pricing obtains.6 This policy result is noteworthy for several reasons. First, it is surprising since North's welfare under uniform pricing is strictly higher than that under price discrimination. Therefore, only when the degree of asymmetry across markets is small can the North implement a policy that yields its most preferred market outcome. Why doesn't the North simply permit PIs? As was noted earlier, if the North permits PIs and markets are sufficiently asymmetric, uniform pricing does not emerge as an equilibrium outcome. Rather, under such circumstances, the high quality firm abstains from serving the Southern market in order to charge a high price in the Northern market, an outcome that is detrimental for Northern consumers and overall Northern welfare. To avoid this outcome, the North is better off prohibiting PIs: while international price discrimination is not as desirable to the North as uniform pricing, it is preferable to an asymmetric market structure under which its firm does not sell in the South. This policy result accords quite well with the type of PI policies that are observed in the world: recall that the two largest markets in the world — the EU and the US — prohibit PIs from most of the rest of the world.7 Our explanation for these observed policy outcomes is that by inducing international market segmentation and shielding their respective firms from the threat of arbitrage-induced PIs from rest of the world, the prohibition of PIs by the EU and the US ensures that their firms choose to serve markets in other parts of the world. Furthermore, our model suggests that the adoption of these policies on the part of the EU and the US makes smaller developing countries indifferent between their policy options since what they do does not affect market outcomes. Such indifference on their part is consistent with the fact that we do not observe a common exhaustion regime across the developing world.8 The EU's stance on exhaustion of IPRs has been clarified over the years in a series of cases decided by the European Court of Justice (ECJ). A prominent recent example is Silhouette International Schmied Gesellschaft mbH & Co. v. Hartlauer Handelsgesellschaft mbH, a case involving the parallel imports of some spectacle frames into Austria from Bulgaria and Soviet Union against the wishes of the trademark owner (Silhoutette). In its 1998 ruling over this case, the ECJ held that national rules allowing for international exhaustion of trademark rights were incompatible with the functioning of the common internal market in the EU. The court ruled clearly in favor of community or regional exhaustion — i.e. parallel imports could flow freely within the EU but not from outside. This directive of the ECJ was in contrast to the historical policies of several major EU members: Austria, Germany, Netherlands, Finland, and the UK all followed international exhaustion provided parallel imports were essentially identical in quality to locally sold goods with the standard for what constituted “material difference” between the two sets of goods differing somewhat across countries. 9 One interpretation of this change in the exhaustion policy of these European nations is that with the formation of the EU, the combined market size of the region came to dictate the exhaustion policy of the region as opposed to the individual market size of each country. If so, the observed outcome is quite in line with what is predicted by our model: all else equal, a sufficiently large increase in the market size of the North makes it optimal for it to switch from allowing PIs from the rest of the world to forbidding them. Our analysis contributes to, and to some extent unifies, two strands of the literature on PIs: one that studies interaction between firms taking government policies as given and another that analyzes the impact of alternative government policies but abstracts from strategic interaction