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Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets

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  • Ganslandt, Mattias

    ()
    (The Research Institute of Industrial Economics)

  • Maskus, Keith E.

    ()
    (Department of Economics)

Abstract

We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets that are integrated at the distributor level by parallel imports (PI). The manufacturing firm needs to set these two prices to balance three competing interests: restricting competition in the PI-recipient market, avoiding resource wastes due to actual trade, and reducing the double-markup problem in the PI-source nation. These trade-offs imply the counterintuitive result that both wholesale and retail prices could diverge as a result of declining trading costs, even as the volume of PI increases. Thus, in some circumstances it may be misleading to think of PI as an unambiguous force for price integration.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 639.

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Length: 30 pages
Date of creation: 15 Apr 2005
Date of revision:
Handle: RePEc:hhs:iuiwop:0639

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Keywords: Vertical Restraints; Parallel Imports; Market Integration;

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References

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  1. Horst Raff & Nicolas Schmitt, 2000. "Endogenous Vertical Restraints in International Trade," Discussion Papers dp00-04, Department of Economics, Simon Fraser University, revised Feb 2000.
  2. Friberg, Richard & Martensen, Kaj, 2001. "Endogenous Market Segmentation and the Law of One Price," Working Paper Series in Economics and Finance 471, Stockholm School of Economics.
  3. Yongmin Chen, 2005. "Vertical Disintegration," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 209-229, 03.
  4. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, vol. 56(1), pages 233-245, January.
  5. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, vol. 23(9), pages 1269-1284, 09.
  6. Malueg, D.A. & Schwartz, M., 1993. "Parallel Imports, Demand Dispersion and International Price Discrimination," Papers 93-6, U.S. Department of Justice - Antitrust Division.
  7. Horst Raff & Nicolas Schmitt, 2004. "Exclusive Dealing and Common Agency in International Markets," CESifo Working Paper Series 1168, CESifo Group Munich.
  8. Yongmin Chen & Keith Maskus, 2005. "Vertical Pricing and Parallel Imports," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 14(1), pages 1-18.
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Citations

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Cited by:
  1. 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.
  2. Mazumdar, Mainak & Banerjee, Dyuti S., 2012. "On price discrimination, parallel trade and the availability of patented drugs in developing countries," International Review of Law and Economics, Elsevier, vol. 32(1), pages 188-195.
  3. A. Mantovani & A. Naghavi, 2010. "Parallel Imports and Innovation in an Emerging Economy," Working Papers 688, Dipartimento Scienze Economiche, Universita' di Bologna.
  4. Raimondos-Møller, Pascalis & Schmitt, Nicolas, 2007. "Commodity Taxation and Parallel Imports," Working Papers 04-2007, Copenhagen Business School, Department of Economics.
  5. Birg, Laura, 2013. "Pharmaceutical regulation at the wholesale level and parallel trade," Center for European, Governance and Economic Development Research Discussion Papers 180, University of Goettingen, Department of Economics.
  6. Birg, Laura, 2013. "Externalities of national pharmaceutical policy when markets are integrated through parallel trade," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79720, Verein für Socialpolitik / German Economic Association.
  7. Eichberger, Jürgen & Mueller-Langer, Frank, 2012. "On the Welfare Effects of Exclusive Distribution Arrangements," MPRA Paper 39691, University Library of Munich, Germany.
  8. 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, vol. 14(2), pages 345-355, April.
  9. Duso, T.; & Herr, A.; & Suppliet, M, 2014. "The Welfare Impact of Parallel Imports: A Structural Approach Applied to the German Market for Oral Anti-diabetics," Health, Econometrics and Data Group (HEDG) Working Papers 14/09, HEDG, c/o Department of Economics, University of York.
  10. Witte, Mark David, 2009. "The currency denomination of external European Union imports after European Union expansion," Economic Systems, Elsevier, vol. 33(3), pages 245-258, September.
  11. Stähler, Frank & Maskus, Keith, 2013. "Retailers as Agents and the Absence of Parallel Trade," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79737, Verein für Socialpolitik / German Economic Association.
  12. Ganslandt, Mattias & Maskus, Keith E., 2007. "Wholesale Price Discrimination and Parallel Imports," Working Paper Series 702, Research Institute of Industrial Economics.
  13. Giorgio Matteucci & Pierfrancesco Reverberi, 2011. "Parallel trade and its impact on incentives to invest in product quality," DIS Technical Reports 2011-05, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  14. McCalman, Phillip, 2010. "Trade policy in a "super size me" world," Journal of International Economics, Elsevier, vol. 81(2), pages 206-218, July.
  15. Li, Changying & Maskus, Keith E., 2006. "The impact of parallel imports on investments in cost-reducing research and development," Journal of International Economics, Elsevier, vol. 68(2), pages 443-455, March.
  16. Birg, Laura, 2013. "Pharmaceutical cost-sharing systems and savings for health care systems from parallel trade," Center for European, Governance and Economic Development Research Discussion Papers 179, University of Goettingen, Department of Economics.

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