Parallel markets

Parallel markets are two or more markets where the same PRODUCT, produced by the same company, are sold at different prices. Parallel markets are more common in Europe than in the United States and are the result of government price setting. Pharmaceutical products are often sold in parallel markets due to differences in government-dictated prices. Many countries regulate the price of medicines and other necessity goods. In Europe, where there is close proximity and few TRADE BARRIERS, consumers will often travel to the lowest-priced country in the EUROPEAN UNION and purchase large quantities of drugs. For pharmaceutical companies, the result is increased sales in countries with low regulated prices and reduced sales in countries with high regulated prices. To combat the problem, drug companies are considering limiting supplies to an amount equal to the estimated DEMAND in each country. Parallel markets are based on the principle of ARBITRAGE, the practice of buying a product at a low price in one market and selling it at a higher price in another market. Arbitrage is as old as trade; a basic business maxim is “buy low and sell high.” Knowledgeable middlemen, knowing the prices of products in different parts of the world, would buy from producers in one region and sell to consumers or merchants in another region. One motivation for the exploration of the New World was the control of landbased trade by merchants in the Middle East. European businesspeople and monarchs knew that new DISTRIBUTION CHANNELs would reduce the power of arbitrageurs. The distinction between arbitrage and parallel markets is how the price difference is created. In parallel markets, price differences are the result of government price controls, while arbitrage is based on the differences in SUPPLY and demand and market knowledge. Parallel markets differ from parallel or underground economies in that parallel markets are open, legal, and regulated market exchanges; parallel economies are unregulated and untaxed exchanges in both legal and illegal products. In parallel markets, the products are produced by the same firm, unlike GRAY MARKETS in which similar or identical products are produced by another firm under LICENSING agreements. Many U.S. consumers flock to Mexico to purchase pharmaceutical drugs produced under license from U.S. companies but sold at much lower prices. Parallel markets create the same CONSUMER BEHAVIOR as that occurring when different taxes are applied to products. In Europe, tax differences on wine and gasoline create a constant flow of consumers back and forth across the English Channel. In the United States, variations in cigarette taxes create interstate smuggling. In the 1990s, Canada significantly raised its tax on cigarettes, only to see tax revenue decrease as consumers stocked up during visits to the United States.
See also UNDERGROUND ECONOMY.