ALFONS PALANGKARAYA (Centre for Microeconometrics, Melbourne Institute of Applied Economic and Social Research, Australia; Intellectual Property Research Institute of Australia, The University of Melbourne, Melbourne) JONGSAY YONG () (Centre for Microeconometrics, Melbourne Institute of Applied Economic and Social Research, Australia; Intellectual Property Research Institute of Australia, The University of Melbourne, Melbourne)
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This paper proposes a vertical control model that features two-part tariff pricing, leader-fringe-follower competition, and investment to characterize the conditions under which parallel imports will (or will not) occur when such activities are legally permitted. In addition, we analyze the effects of parallel imports on the incentive of an authorized distributor to invest in market development. We find that parallel imports cannot arise if the target and the source market either differ too greatly or are too similar in size. Two results are worth emphasizing. First, parallel imports can arise even if the IP owner has the ability to deter parallel imports. Second, the presence of parallel imports and even the threat posed by parallel imports can reduce the domestic distributor's market development investment.
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