Besides having to meet price competition country by country and product by product companies have to guard against competition with their own subsidiaries or branches. Because of the different prices possible in different country markets, a product sold in the one country may be exported to another and undercut the prices charged in that country. For example, to meet economic conditions and local competition, an American pharmaceutical company might sell its drugs in a developing country at a low price and then discover that these discounted drugs are being exported to a third country, where, as parallel imports, they are in direct competition with the same product sold for higher prices by the same firm.
Parallel imports develop when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturer’s regular distribution system. This practice is lucrative when wide margins exist between prices for the same products in different countries. A variety of conditions can create a profitable opportunity for a parallel market.
Restrictions brought about by import quotas and high tariffs also lead to parallel imports and make illegal imports attractive, India has a three tier duty structure on computer parts ranging from 50 to 80 per cent on imports. As a result, estimates are that as much as 35 per cent of India’s domestic computer hardware sales are accounted for by the gray market.
The possibility of a parallel market occurs whenever price differences are greater than the cost of transportation between two markets . In Europe because of different taxes and competitive price structures, prices for the same product vary between countries. When this occurs, it is not unusual for companies to find themselves competing in one country with their own products imported from another European country at lower prices. Pharmaceutical companies face this problem in Italy, Greece, and Spain because of price caps imposed on prescription drugs in those countries. For example, the ulcer drug Losec sells for only $18 in Spain, but goes for $39 in Germany. The heart drug Plavix costs $ 55 in France and sells for $79 in London. Presumably such price differentials were to cease once all restrictions to trade were eliminated in the European Union, and in most cases this is true . However, the European Union does not prevent countries from controlling drug prices as part of their national health plans.
The drug industry has tried to stop parallel trade in Europe but has been overruled by European authorities. This time the industry is trying a different approach, restricting supplies to meet only local demand according to formulas based on prior demand and anticipated growth. The idea is that a country should receive just enough of a drug for its citizens. Wholesalers that order more with the intention of shipping the drugs to higher price markets would not have enough to do so. A number of major pharmaceutical companies have imposed similar restrictions. The companies say these measures are intended to streamline distribution, help prevent medicine shortages, and curtail excess inventory, whereas distributors claim the strategy is aimed at thwarting cross border drug trading. The fact is half of all demand in Britain of several products is being met by imports from low priced countries and companies are attempting to curtail parallel.
Gray market pharmaceuticals from Canada to the United States are estimated to be about $427 million annually. Not a large amount when compared to the $135 billion US drug market, but it can be substantial for specific drugs like Paxil, Zyban, and Viagra. Although importing prescription drugs from a foreign country, including Canada, is against US, law a person can travel to Canada or Mexico to make purchases or can buy over the Internet. Technically buying over the Internet and having the drugs mailed to the US is illegal. However, the government has taken a relatively lax view toward such purchases provided the supply does not exceed 90 days. Thanks to the low value of the Canadian dollar and government price caps on drugs, am American can often save 50 per cent to 70 per cent by ordering from the 70 or more Internet pharmacies operating across Canada.