Advanced Search
MyIDEAS: Login

Parallel Imports: Challenges from Unauthorized Distribution Channels

Contents:

Author Info

  • Reza Ahmadi

    ()
    (The Anderson School, University of California, Los Angeles, 110 Westwood Plaza, Suite B512, Los Angeles, California 90095)

  • B. Rachel Yang

    ()
    (The Anderson School, University of California, Los Angeles, 110 Westwood Plaza, Suite B512, Los Angeles, California 90095)

Registered author(s):

    Abstract

    We examine the problem of parallel imports: unauthorized flows of products across countries, which compete with authorized distribution channels. The traditional economics model of a discriminating monopolist that has different prices for the same good in different markets requires the markets to be separated in some way, usually geographically. The profits from price discrimination can be threatened by parallel imports that allow consumers in the high-priced region some access to the low-priced marketplace. However, as this article shows, there is a very real possibility that parallel imports may actually increase profits. The basic intuition is that parallel importation becomes another channel for the authentic goods and creates a new product version that allows the manufacturer to price discriminate. We propose a two-country, three-stage model to quantitatively study the effects and strategies. In the third stage, and in the higher priced country where parallel imports have entered, we characterize the resulting market segmentation. One segment of consumers stays with the authorized version as they place more value on the warranty and services that come with the authorized version. Another segment switches to parallel imports because a lower price is offered due to lack of country-specific features or warranties. Parallel imports also generate a third and new segment that would not have bought this product before. Unlike counterfeits that are fabricated by imitators, all parallel imports are genuine and sourced from the manufacturer in the lower-priced country through authorized dealers. Therefore, the manufacturer's global sales quantity should increase, but profit may rise or fall depending on the relative sizes and profitability of the segments. A profit-maximizing parallel importer should set price and quantity in the second stage after observing the manufacturer's prices in both countries. There will be a threshold of across-country price gap above which parallel imports would occur. In the first stage, the manufacturer can anticipate the possible occurrence of a parallel import, its price and quantity, and its effect on authorized sales in each country to make a coordinated pricing decision to maximize the global supply chain profit. Under some circumstances the manufacturer should allow parallel imports and under others should prevent them. Through a Stackelberg game we solve for the optimal pricing strategy in each scenario. We then find in one extension that when the number of parallel importers increases, the optimal authorized price gap should narrow, but the prices and quantities of parallel imports may rise or fall. In another extension, we .nd that when the manufacturer has other means—such as monitoring dealers, differentiating designs, and unbundling warranties—to contain parallel imports, the authorized price gap can widen as a function of the effectiveness of nonpricing controls. In summary, parallel imports may help the manufacturer to extend the global reach of its product and even boost its global profit. If the manufacturer offers a discount version through its authorized dealers, it is running a high risk of confusing customers and tarnishing brand images. Parallel imports may cause similar concerns for the manufacturer, but unauthorized dealers are perceived as further removed from the manufacturer. Therefore, there is less risk of confusing consumers when parallel imports are channeled through unauthorized dealers. Furthermore, they are more nimble in diverting the product whenever their transshipment and marketing costs are small enough not to offset the authorized price gap and the valuation discount. This may explain why some manufacturers fiercely fight parallel imports, while others knowingly use this alternative channel.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://dx.doi.org/10.1287/mksc.19.3.279.11799
    Download Restriction: no

    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 19 (2000)
    Issue (Month): 3 (March)
    Pages: 279-294

    as in new window
    Handle: RePEc:inm:ormksc:v:19:y:2000:i:3:p:279-294

    Contact details of provider:
    Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Email:
    Web page: http://www.informs.org/
    More information through EDIRC

    Related research

    Keywords: International Marketing; Parallel Imports; Pricing; Intrabrand Competition; Channel Conflict; Stackelberg Game;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Kamal Saggi & Santanu Roy, 2011. "Equilibrium Parallel Import Policies and International Market Structure," Vanderbilt University Department of Economics Working Papers 1113, Vanderbilt University Department of Economics.
    2. Gerd Küpper & Bert Willems, 2007. "Arbitrage in energy markets: competing in the incumbent's shadow," Center for Economic Studies - Discussion papers ces0730, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
    3. Arijit Mukherjee & Laixun Zhao, 2012. "Profitable parallel trade in unionized markets," Journal of Economics, Springer, vol. 107(3), pages 267-276, November.
    4. Raimondos-Møller, Pascalis & Schmitt, Nicolas, 2007. "Commodity Taxation and Parallel Imports," Working Papers 04-2007, Copenhagen Business School, Department of Economics.
    5. Raff, Horst & Schmitt, Nicolas, 2005. "Why Parallel Trade May Raise Producers' Profits," Economics Working Papers 2005,07, Christian-Albrechts-University of Kiel, Department of Economics.
    6. Matsui, Kenji, 2014. "Gray-market trade with product information service in global supply chains," International Journal of Production Economics, Elsevier, vol. 147(PB), pages 351-361.
    7. Teodora Cosac, 2004. "Vertical Restraints and Parallel Imports with Differentiated Products," Industrial Organization 0401006, EconWPA.
    8. Ying Xiao & Udatta Palekar & Yunchuan Liu, 2011. "Shades of gray—the impact of gray markets on authorized distribution channels," Quantitative Marketing and Economics, Springer, vol. 9(2), pages 155-178, June.
    9. Braouezec, Yann, 2012. "Customer-class pricing, parallel trade and the optimal number of market segments," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 605-614.
    10. Noriaki Matsushima & Toshihiro Matsumura, 2010. "Profit-Enhancing Parallel Imports," Open Economies Review, Springer, vol. 21(3), pages 433-447, July.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:19:y:2000:i:3:p:279-294. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.