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Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis

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Author Info
Szymanski, Stefan
Valletti, Tommaso

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Abstract

This paper analyses the issue of parallel trade (arbitrage) for products protected by intellectual property rights. Many countries have traditionally allowed owners of intellectual property rights to prohibit arbitrage in the face of international price discrimination. In a well-known paper Malueg and Schwartz (1994) showed that this policy decreases social welfare when the same markets are served in both regimes, with and without arbitrage. Their model considered only the setting of prices, and not investment in product development. We consider a two-stage game where firms choose quality first and then prices. Since the threat of arbitrage ex post reduces the incentive to invest ex ante, the net benefits of parallel trade may vanish. We also show that the size of the welfare effects is significantly affected by the presence of a ‘generic’ product, which represents a form of competition for the monopolist. The monopolist will introduce a ‘fighting brand’ to compete with the generic, which dilutes but does not eliminate the result on the adverse effects of parallel trade on investments.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5022.

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Date of creation: Apr 2005
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Handle: RePEc:cpr:ceprdp:5022

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Related research
Keywords: investments; parallel trade; price discrimination;

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
O34 - Economic Development, Technological Change, and Growth - - Technological Change - - - Intellectual Property Rights

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bae, Sang Hoo & Choi, Jay Pil, 2006. "A model of piracy," Information Economics and Policy, Elsevier, vol. 18(3), pages 303-320, September. [Downloadable!] (restricted)
  2. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Blackwell Publishing, vol. 23(9), pages 1269-1284, 09. [Downloadable!] (restricted)
  3. Keith E. Maskus & Yongmin Chen, 2004. "Vertical Price Control and Parallel Imports: Theory and Evidence," Review of International Economics, Blackwell Publishing, vol. 12(4), pages 551-570, 09. [Downloadable!] (restricted)
    Other versions:
  4. Stokey, Nancy L, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 355-71, August. [Downloadable!] (restricted)
  5. Hausman, J.A. & Mackie-Mason, J.K., 1988. "Price Discrimination And Patent Policy," Papers 88-13, Michigan - Center for Research on Economic & Social Theory.
    Other versions:
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  8. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, vol. 56(1), pages 233-245, January. [Downloadable!] (restricted)
  9. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June. [Downloadable!]
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  10. Salant, Stephen W, 1989. "When Is Inducing Self-selection Suboptimal for a Monopolist?," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 391-97, May. [Downloadable!] (restricted)
  11. Abbott, Frederick M, 1998. "First Report (Final) to the Committee on International Trade Law of the International Law Association on the Subject of Parallel Importation," Journal of International Economic Law, Oxford University Press, vol. 1(4), pages 607-36, December.
  12. Aidan Hollis, 2002. "The importance of being first: evidence from Canadian generic pharmaceuticals," Health Economics, John Wiley & Sons, Ltd., vol. 11(8), pages 723-734. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Steve Thompson, 2009. "Grey Power: An Empirical Investigation of the Impact of Parallel Imports on Market Prices," Journal of Industry, Competition and Trade, Springer, vol. 9(3), pages 219-232, September. [Downloadable!] (restricted)
  2. Margaret K. Kyle, 2007. "Strategic Responses to Parallel Trade," NBER Working Papers 12968, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Alfons Palangkaraya & Jongsay Yong, 2006. "Parallel Imports, Market Size and Investment Incentive," Melbourne Institute Working Paper Series wp2006n25, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
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