by Rachel Korn
The introduction of parallel trade mechanisms allowing for the free trade of pharmaceutical goods in the European Economic Area represents a significant departure from the standard monopolistic competition pricing structure in the pharmaceutical market, in which firms have a great deal of control over pricing. Another mechanism, external reference pricing, also contributes to undermining traditional price structures by imposing a price ceiling on drugs. As these methods of regulating pricing in the healthcare market are receiving growing interest in countries such as the United States, it is prudent to consider their effects. It is apparent that parallel trade and external reference pricing decrease average drug costs, but little has been said about their effects on drug availability. Using global patent data from the European Patent Office PATSTAT database as a proxy for drug availability, I investigate how parallel trade and external reference pricing affect the decision of firms to file a pharmaceutical patent in a given country. I accomplish this through a logistic regression model with a difference-in-differences approach to estimate the probability of patenting a pharmaceutical in an OECD country, given that a patent has previously been approved in the United States. I find that the presence of parallel trade in a country significantly decreases the probability of patenting and increases patent lag time while external reference pricing unexpectedly increases the probability of patenting and decreases patent lag time. These findings demonstrate the complexity in attempting to create policy to regulate rising pharmaceutical prices, as doing so may increase affordability of existing drugs in a country while decreasing availability of new ones.
Advisors: Professor Michelle Connolly | JEL Codes: I1, I11, I19
