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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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2005/wp-cesifo-2005-07/cesifo1_wp1503.pdf
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Bibliographic Info

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. Malueg, D.A. & Schwartz, M., 1993. "Parallel Imports, Demand Dispersion and International Price Discrimination," Papers 93-6, U.S. Department of Justice - Antitrust Division.
  2. Deneckere, Raymond & Marvel, Howard P & Peck, James, 1997. "Demand Uncertainty and Price Maintenance: Markdowns as Destructive Competition," American Economic Review, American Economic Association, vol. 87(4), pages 619-41, September.
  3. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, vol. 23(9), pages 1269-1284, 09.
  4. Gallini, Nancy T. & Hollis, Aidan, 1999. "A contractual approach to the gray market," International Review of Law and Economics, Elsevier, vol. 19(1), pages 1-21, March.
  5. Yongmin Chen, 2005. "Vertical Disintegration," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 209-229, 03.
  6. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, vol. 56(1), pages 233-245, January.
  7. Knox, Daniel & Richardson, Martin, 2003. "Trade policy and parallel imports," European Journal of Political Economy, Elsevier, vol. 19(1), pages 133-151, March.
  8. Reza Ahmadi & B. Rachel Yang, 2000. "Parallel Imports: Challenges from Unauthorized Distribution Channels," Marketing Science, INFORMS, vol. 19(3), pages 279-294, March.
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Cited by:
  1. A. Mantovani & A. Naghavi, 2010. "Parallel Imports and Innovation in an Emerging Economy," Working Papers 688, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. 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.
  3. Santanu Roy & Kamal Saggi, 2012. "Strategic competition and optimal parallel import policy," Canadian Journal of Economics, Canadian Economics Association, vol. 45(4), pages 1369-1396, November.
  4. Beine, Michel & Grauwe, Paul De & Grimaldi, Marianna, 2009. "The impact of FX central bank intervention in a noise trading framework," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1187-1195, July.
  5. Carlo Altavilla & Paul De Grauwe, 2005. "Non-Linearities in the Relation between the Exchange Rate and its Fundamentals," CESifo Working Paper Series 1561, CESifo Group Munich.
  6. Raimondos-Møller, Pascalis & Schmitt, Nicolas, 2007. "Commodity Taxation and Parallel Imports," CEPR Discussion Papers 6580, C.E.P.R. Discussion Papers.

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