The Price Effects of Competition from Parallel Imports and Therapeutic Alternatives: Using Dynamic Models to Estimate the Causal Effect on the Extensive and Intensive Margins

Abstract

This paper studies responses to competition with the use of dynamic models that distinguish between short- and long-term price effects. The dynamic models also allow lagged numbers of competitors to become valid and strong instruments for the current numbers, which enables studying the causal effects using flexible specifications. A first parallel trader is found to decrease prices of exchangeable products by 7% in the long term. On the other hand, prices do not respond to the first competitor that sells therapeutic alternatives; but competition from four or more competitors that sell on-patent therapeutic alternatives decreases prices by about 10% in the long term.

Direct and indirect savings from parallel imports in Sweden

“…In comparison, the raw (unweighted) average price reduction equaled 5.47%. The results are similar to those reported for tablets and capsules by Granlund [ 9 ]. For example, the long-term effect of a first parallel trader that also sold exchangeable products was estimated to be − 7.0% by Granlund [ 9 ], whereas here it was − 6.5%.…”

“…The differential dlnP * i /dD_PiSubstance * st shows the weighted average long-term effect of facing competition from at least one parallel importer selling the same substance. 9 Applying the formula 100 * [exp(−0.0601) − 1], the effect equaled a price reduction by 5.83% for the first study period. In comparison, the raw (unweighted) average price reduction equaled 5.47%.…”

“…To overcome the problem with weak and potentially endogenous instruments, Granlund [ 9 ] used a dynamic model that allowed lags of competition variables to be used as instruments for their current values. This approach yielded sufficiently many strong instruments for also studying the causal effects on the intensive margins, i.e., how the number of parallel traders and the number of therapeutic competitors affect prices.…”

“…This approach yielded sufficiently many strong instruments for also studying the causal effects on the intensive margins, i.e., how the number of parallel traders and the number of therapeutic competitors affect prices. Granlund [ 9 ] used part of the data used in the present study: that for tablets and capsules sold in October 2002–October 2007. For this study, we estimated similar price functions as Granlund [ 9 ], but also did so for the period of January 2011–December 2017, for all forms of administrations, and calculated the direct and indirect savings yielded by parallel imports.…”

“…Granlund [ 9 ] used part of the data used in the present study: that for tablets and capsules sold in October 2002–October 2007. For this study, we estimated similar price functions as Granlund [ 9 ], but also did so for the period of January 2011–December 2017, for all forms of administrations, and calculated the direct and indirect savings yielded by parallel imports.…”