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Market power in the global economy: the exhaustion and protection of intellectual property

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  • Kamal Saggi

    ()
    (Department of Economics, Vanderbilt University)

Abstract

This paper analyzes economic linkages between the exhaustion and protection of intellectual property. We consider a North-South model, where a firm that enjoys monopoly status in the North by virtue of an intellectual property right (IPR) -- such as a patent or a trademark -- has the incentive to price discriminate internationally because Northern consumers value its product more than Southern ones. The key intuition underlying the model is that while Northern policy regarding the territorial exhaustion of IPRs determines whether the firm can price discriminate internationally and therefore exercise market power across regions, Southern policy regarding the protection of IPRs determines the firm's monopoly power within the South. In equilibrium, each region's policy takes into account the firm's pricing behavior, its incentive to export, and the other region's policy stance. Major results are: (a) the North is more likely to prefer national exhaustion when the South does not protect IPRs whereas the South is more willing to protect intellectual property if the North chooses national exhaustion; (b) the firm values protection of intellectual property relatively more than the freedom to price discriminate internationally that exists under national exhaustion if and only if the quality gap between it and Southern imitators lies below a certain threshold; (c) except for the situation where the firm sells in the South regardless of the global policy environment, the two regions find themselves in a policy stand-off wherein each region takes into account whether or not the other would be willing to implement its less preferred policy to induce the firm to export and (d) requiring the South to protect IPRs increases global welfare iff (i) it induces the North to reverse its policy stance from national to international exhaustion and (ii) the quality gap between the Northern original and the Southern imitation exceeds a certain minimum threshold.

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File URL: http://www.accessecon.com/pubs/VUECON/vu11-w14.pdf
File Function: First version, September 2011
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1114.

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Date of creation: Sep 2011
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Handle: RePEc:van:wpaper:1114

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Exhaustion of IPRs; Imitation; Market power; TRIPS; Welfare;

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References

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  1. Lee, Jeong-Yeon & Mansfield, Edwin, 1996. "Intellectual Property Protection and U.S. Foreign Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 181-86, May.
  2. Valletti, Tommaso M., 2006. "Differential pricing, parallel trade, and the incentive to invest," Journal of International Economics, Elsevier, vol. 70(1), pages 314-324, September.
  3. 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.
  4. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, vol. 56(1), pages 233-245, January.
  5. Pinelopi Koujianou Goldberg, 2010. "Alfred Marshall Lecture Intellectual Property Rights Protection in Developing Countries: The Case of Pharmaceuticals," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 326-353, 04-05.
  6. Roy, Santanu & Saggi, Kamal, 2012. "Equilibrium parallel import policies and international market structure," Journal of International Economics, Elsevier, vol. 87(2), pages 262-276.
  7. Peter Nunnenkamp & Julius Spatz, 2004. "Intellectual property rights and foreign direct investment: A disaggregated analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(3), pages 393-414, September.
  8. Maskus, Keith E. & Penubarti, Mohan, 1995. "How trade-related are intellectual property rights?," Journal of International Economics, Elsevier, vol. 39(3-4), pages 227-248, November.
  9. Branstetter, Lee & Fisman, Ray & Foley, C. Fritz & Saggi, Kamal, 2011. "Does intellectual property rights reform spur industrial development?," Journal of International Economics, Elsevier, vol. 83(1), pages 27-36, January.
  10. Keith E. Maskus & Yongmin Chen, 2004. "Vertical Price Control and Parallel Imports: Theory and Evidence," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 551-570, 09.
  11. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, vol. 23(9), pages 1269-1284, 09.
  12. Grossman, Gene & Lai, Edwin, 2006. "Parallel Imports and Price Controls," CEPR Discussion Papers 5779, C.E.P.R. Discussion Papers.
  13. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  14. Szymanski, Stefan & Valletti, Tommaso, 2005. "Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis," CEPR Discussion Papers 5022, C.E.P.R. Discussion Papers.
  15. Kamal Saggi & Santanu Roy, 2011. "Strategic Competition and Optimal Parallel Import Policy," Vanderbilt University Department of Economics Working Papers 1117, Vanderbilt University Department of Economics.
  16. Ivus, Olena, 2010. "Do stronger patent rights raise high-tech exports to the developing world?," Journal of International Economics, Elsevier, vol. 81(1), pages 38-47, May.
  17. Smith, Pamela J., 1999. "Are weak patent rights a barrier to U.S. exports?," Journal of International Economics, Elsevier, vol. 48(1), pages 151-177, June.
  18. Olena Ivus, 2011. "Trade-related intellectual property rights: industry variation and technology diffusion," Canadian Journal of Economics, Canadian Economics Association, vol. 44(1), pages 201-226, February.
  19. Tommaso M. Valletti & Stefan Szymanski, 2006. "PARALLEL TRADE, INTERNATIONAL EXHAUSTION AND INTELLECTUAL PROPERTY RIGHTS: A WELFARE ANALYSIS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 499-526, December.
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Cited by:
  1. Ray Chaudhuri, A., 2014. "Acquisitions by Multinationals and Trade Liberalization," Discussion Paper 2014-006, Tilburg University, Center for Economic Research.

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