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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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1503.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1503

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Keywords: parallel trade; distribution;

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References

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  1. Deneckere, R. & Marvel, H.P. & Peck, J., 1995. "Demand Uncertainty and Price Maintenace : Markdowns as Destructive Competition," Working papers, Wisconsin Madison - Social Systems 9507, Wisconsin Madison - Social Systems.
  2. Yongmin Chen, 2005. "Vertical Disintegration," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 14(1), pages 209-229, 03.
  3. Reza Ahmadi & B. Rachel Yang, 2000. "Parallel Imports: Challenges from Unauthorized Distribution Channels," Marketing Science, INFORMS, INFORMS, vol. 19(3), pages 279-294, March.
  4. Knox, Daniel & Richardson, Martin, 2003. "Trade policy and parallel imports," European Journal of Political Economy, Elsevier, Elsevier, vol. 19(1), pages 133-151, March.
  5. Nancy T. Gallini & Aidan Hollis, 1996. "A Contractual Approach to the Gray Market," Working Papers gallini-96-01, University of Toronto, Department of Economics.
  6. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, Elsevier, vol. 56(1), pages 233-245, January.
  7. Malueg, D.A. & Schwartz, M., 1993. "Parallel Imports, Demand Dispersion and International Price Discrimination," Papers, U.S. Department of Justice - Antitrust Division 93-6, U.S. Department of Justice - Antitrust Division.
  8. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, vol. 23(9), pages 1269-1284, 09.
  9. Howard P. Marvel & Raymond Deneckere & James Peck, 1995. "Demand Uncertainty and Price Maintainance: Markdowns as Destructive Competition," Working Papers, Ohio State University, Department of Economics 018, Ohio State University, Department of Economics.
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Cited by:
  1. Giorgio Matteucci & Pierfrancesco Reverberi, 2011. "Parallel trade and its impact on incentives to invest in product quality," DIS Technical Reports, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza" 2011-05, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  2. A. Mantovani & A. Naghavi, 2010. "Parallel Imports and Innovation in an Emerging Economy," Working Papers 688, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Roy, Santanu & Saggi, Kamal, 2011. "Equilibrium parallel import policies and international market structure," Policy Research Working Paper Series 5802, The World Bank.
  4. Santanu Roy & Kamal Saggi, 2012. "Strategic competition and optimal parallel import policy," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 45(4), pages 1369-1396, November.
  5. Raimondos-Møller, Pascalis & Schmitt, Nicolas, 2007. "Commodity Taxation and Parallel Imports," Working Papers, Copenhagen Business School, Department of Economics 04-2007, Copenhagen Business School, Department of Economics.
  6. Arijit Mukherjee & Laixun Zhao, 2012. "Profitable parallel trade in unionized markets," Journal of Economics, Springer, Springer, vol. 107(3), pages 267-276, November.
  7. Shen Guo & Bin Hu & Hai Zhong, 2013. "Impact of parallel trade on pharmaceutical firm’s profits: rise or fall?," The European Journal of Health Economics, Springer, Springer, vol. 14(2), pages 345-355, April.

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