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Parallel trade, price discrimination, investment and price caps

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Author Info
Stefan Szymanski
Tommaso Valletti

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Abstract

"Parallel trade is the resale of a product by a wholesaler in a market other than that intended by the manufacturer. One of its consequences is that manufacturers may be prevented from price discriminating between markets that have different willingness to pay for the product in question. Some legal regimes give the manufacturer the right to prohibit parallel trade, but others do not. We examine the policy implications of parallel trade in a world in which manufacturers invest in product quality, and have the possibility to develop different quality variants of their goods. We also consider the possibility that the authorities may impose price caps and compulsory licensing (as commonly occurs for some pharmaceutical products). We find that taking investment incentives into account makes parallel trade much less likely to enhance overall welfare, which implies that parallel trade in products intensive in R&D, such as pharmaceuticals, is less desirable than in fields such as branded consumer products. We also find that, somewhat surprisingly, the threat of parallel trade does not induce firms to market inferior versions of their products in poor countries. However, parallel trade is less likely to be detrimental to welfare when there are price caps, since compulsory licensing can mitigate the major cost of parallel trade (namely a refusal to supply a poor country market)." Copyright © CEPR, CES, MSH, 2005.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0327.2005.00149.x
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Publisher Info
Article provided by CEPR, CES, MSH in its journal Economic Policy.

Volume (Year): 20 (2005)
Issue (Month): 44 (October)
Pages: 705-749
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Handle: RePEc:bla:ecpoli:v:20:y:2005:i:44:p:705-749

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  1. Margaret K. Kyle, 2007. "Strategic Responses to Parallel Trade," NBER Working Papers 12968, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Höeffler, Felix & Schmidt, Klaus M., 2007. "Two Tales on Resale," CEPR Discussion Papers 6248, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Felix Höffler & Klaus M. Schmidt, 2007. "Two Tales on Resale," Discussion Papers 198, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  4. Grossman, Gene & Lai, Edwin, 2006. "Parallel Imports and Price Controls," CEPR Discussion Papers 5779, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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