Pharmaceutical regulation under market integration through parallel trade

In this paper, I study the effect of parallel trade (cross‐border resale of goods without the authorization of the manufacturer) on pharmaceutical regulation. Governments may restrict prices directly (price caps) or limit third‐party payer reimbursement for the drug (reimbursement limits). I find that parallel trade may relax regulation in the source country of parallel imports under both instruments and intensify regulation in the destination country under a reimbursement limit. I also find that parallel trade may change regulatory preferences: under no parallel trade, both the source and destination country set price caps, and under parallel trade, the source country sets a price cap but the destination country sets a reimbursement limit, thereby enforcing a higher price cap in the South. This implies that drug prices are higher under parallel trade in both source and destination countries.