The welfare impact of parallel imports: A structural approach applied to the German market for oral antidiabetics

We investigate the welfare impact of parallel imports using a large panel data set containing monthly information on sales, ex-factory prices, and further product characteristics for all 700 antidiabetic drugs sold in Germany between 2004 and 2010. We estimate a two-stage nested logit model of demand and, based on an oligopolistic model of multi-product firms, we then recover the marginal costs and mark-ups. We finally evaluate the effect of the parallel imports' policy by calculating a counter-factual scenario without parallel trade. According to our estimates, parallel imports reduce the prices for patented and generic drugs by 39% and 0.05%, respectively. This amounts to an increase in the demand-side surplus by 11.4 million per year which is relatively small compared to the market size of around 470million. Manufacturers of original drugs, instead, lose more than half of their variable profits when parallel trade is allowed and only a small fraction of these rents are appropriated by the parallel importers.