The effect of Canadian imports on prescription drug prices in the U.S.

Reimportation of prescription drugs by American consumers from Canada has been a high-visibility policy issue. The large price discrepancies for some patented drugs arise from market pricing in the U.S. and a system of administered pricing in Canada. The model assumes that there are two classes of U.S. consumers: one group who cannot reimport drugs at any cost, and a second group with a distribution of reimportation costs. Under the assumption that the group who can reimport drugs has lower willingness to pay, reimportation serves as a mechanism for price discrimination in the U.S. market.The results include the following: 1) a decline in the Canadian price may raise the U.S. price; 2) a shift down in the distribution of reimportation costs may similarly raise the U.S. price; 3) a shift down in the distribution of reimportation costs may raise drug manufacturer profits.

► I study the effects on U.S. drug prices of expanded reimportation from Canada.
► Only one group of U.S. consumers can purchase in Canada.
► A shift down in the distribution of reimportation costs may raise the U.S. price.
► A shift down in reimportation costs may raise drug manufacturer profits.