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Why Parallel Trade may Raise Producers Profits

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  • Horst Raff
  • Nicolas Schmitt

Abstract

This paper shows that a manufacturer may benefit from parallel trade. In addition to an intuitive condition about the effect of demand shocks, this occurs when competitive retailers must order inventories before they know the realization of demand and for products whose sale value drops at the end of the demand period. For these types of products, letting retailers trade unsold inventories generally results in larger orders placed with the manufacturer, higher manufacturer profit and higher consumer surplus. The model provides a simple explanation as to why the volume of parallel trade is now very large and accepted by manufacturers for some products such as automobiles, clothes, toys, consumer electronics, musical recordings, cosmetics and perfumes.

Suggested Citation

  • Horst Raff & Nicolas Schmitt, 2005. "Why Parallel Trade may Raise Producers Profits," CESifo Working Paper Series 1503, CESifo.
    • Handle: RePEc:ces:ceswps:_1503
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    References listed on IDEAS

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    1. Malueg, David A. & Schwartz, Marius, 1994. "Parallel imports, demand dispersion, and international price discrimination," Journal of International Economics, Elsevier, vol. 37(3-4), pages 167-195, November.
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    More about this item

    Keywords

    parallel trade; distribution;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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