Impact of parallel trade on pharmaceutical firm's profits: rise or fall?

Most existing studies on parallel trade conclude that it reduces pharmaceutical firms' profits. One special feature of the pharmaceutical industry is the presence of price regulation in most countries. Taking into account the impact of parallel trade on the regulated pharmaceutical prices [Pecorino, P.: J. Health Econ. 21, 699-708 (2002)] shows that a pharmaceutical firm's profit is greater in the presence of parallel trade. The present paper relaxes the assumption on identical demands among countries, and takes into account transaction costs. The results of our model show that a firm's profits may increase or decrease in the presence of parallel trade, depending on its bargaining power in the price negotiation and market size of the drug. Changes in social welfare due to the transition to parallel trade regime are also considered.