Parallel imports and a mandatory substitution reform: a kick or a muff for price competition in pharmaceuticals?

What has been the effect of competition from parallel imports on prices of locally sourced on-patent drugs? Did the 2002 Swedish mandatory substitution reform increase this competition? To answer these questions, we carried out difference-in-differences estimation on monthly data for a panel of all locally sourced on-patent prescription drugs sold in Sweden during the 40 months from January 2001 to April 2004. On average, facing competition from parallel imports caused a 15-17% fall in price. While the reform increased the effect of competition from parallel imports, it was only by 0.9%. The reform, however, did increase the effect of therapeutic competition by 1.6%.