Pharmaceutical regulation at the wholesale level and parallel trade

This paper studies the e¤ect of pharmaceutical regulation at the wholesale level, if markets are integrated by parallel trade, i.e. trade outside the manufacturer’s authorized distribution channel. In particular, maximum wholesale margins, a restriction of pricing by the intermediary, and mandatory rebates, a restriction of the pricing by the manufacturer, are analyzed with respect to their e¤ect on drug prices, quantities, and public pharmaceutical expenditure. Maximum wholesale margins enhance the manufacturer’s ability to reduce competition from parallel trade in the destination country by increasing wholesale prices. In a symmetric equilibrium, maximum wholesale margins of both countries partly o¤set each other. Mandatory rebates may be a policy alternative, as they exhibit a reinforcing e¤ect with respect to drug prices. JEL classi…cation: F12, I11, I18