External reference pricing policies, price controls, and international patent protection Difei Geng and Kamal Saggi y Department of Economics Vanderbilt University September 2015 Abstract This paper analyzes the economics of external reference pricing (ERP), a policy under which the price that a rm is allowed to charge in one country depends upon its prices in other countries. In our model, a single rm produces a patented product that it can potentially sell in two countries (home and foreign). The rm has an incentive to price discriminate internationally because home consumers are assumed to have a greater willingness to pay than foreign ones. Homes optimal ERP policy is to permit a level of international price discrimination at which the rm is just willing to export. Even though homes ERP policy generates a negative price spillover for foreign consumers, its equilibrium policy maximizes joint welfare of the two countries. If foreign can impose a price control (PC) on the rm, homes ERP policy not only undermines the PC by raising the minimum price at which the rm is willing to sell abroad, it also partly transmits it back to domestic consumers. There exist circumstances where a tightening of the foreign PC makes both countries better o/. We also consider a scenario where the lack of foreign patent protection generates competition from a competitively priced generic. Such competition induces home to loosen its ERP policy. Finally, we nd that some degree of international cooperation is necessary to ensure that welfare increases due to the strengthening of foreign patent protection. Keywords : External reference pricing policies, price controls, exporting, trade barriers, patent protection, imitation, welfare. JEL Classications : F10, F12, O34, D42. E-mail: difei.geng.1@vanderbilt.edu. y E-mail: k.saggi@vanderbilt.edu. 1