Parallel trade and its impact on incentives to invest in product quality
AbstractIt is widely argued that international arbitrage, or parallel trade (PT), trades off static against dynamic efficiency so that, compared with a national exhaustion regime of intellectual property rights, worldwide consumer surplus rises at the expense of R&D investment. We show that this common wisdom is rather the exception than the rule. Indeed, quality investment often rises under international exhaustion, since it strengthens vertical differentiation between the original product and parallel imports. In this case, there is no trade-off at all, so that encouraging PT improves welfare, or the reverse trade-off occurs where investment increases and consumer surplus declines, while PT has ambiguous welfare effects. We find that, when allowed to use dual pricing, the R&D firm artificially restores national exhaustion. We also find that the expected trade-off never occurs under non-linear pricing and when the foreign country is regulated, although in such cases welfare rises when PT is banned.
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Bibliographic InfoPaper provided by Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza" in its series DIS Technical Reports with number 2011-05.
Date of creation: May 2011
Date of revision:
Parallel trade; Intellectual Property Rights; R&D investment; Vertical contract; Regulation;
Find related papers by JEL classification:
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
- F15 - International Economics - - Trade - - - Economic Integration
- O34 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-08 (All new papers)
- NEP-COM-2012-03-08 (Industrial Competition)
- NEP-INO-2012-03-08 (Innovation)
- NEP-INT-2012-03-08 (International Trade)
- NEP-IPR-2012-03-08 (Intellectual Property Rights)
- NEP-TID-2012-03-08 (Technology & Industrial Dynamics)
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