Parallel trade and reimbursement regulation

This paper studies interaction of pharmaceutical regulation and parallel trade in a North-South framework. An innovative Örm located in the North can sell its drug only in the North or in both countries. Governments may limit reimbursement for the drug. Reimbursement limits reduce the Örmís incentive to supply the South, with the threat of withdrawal from the South being larger if both countries regulate as compared to only the South limiting reimbursement. Stricter regulation, i.e. a lower reimbursement limit in the Northern country increases the incentive to sell in the South. Under parallel trade, the welfare maximing reimbursement limit in the North is lower than under segmented markets, while the reimbursement limit in the South is not a§ected. If both countries cooperate in reimbursement policies, both of them adopt less strict reimbursement regimes. Cooperation results in a decrease in social welfare in the North but in an increase in welfare in the South.