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Strategic Competition and Optimal Parallel Import Policy

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Author Info

  • Kamal Saggi

    () (Department of Economics, Vanderbilt University)

  • Santanu Roy

    () (Department of Economics, Southern Methodist University)

Abstract

This paper shows that parallel import policy can act as an instrument of strategic trade policy. We demonstrate this result in two-country international duopoly where a domestic monopolist competes with a rival firm in the foreign market if it chooses to incur the fixed investment cost of exporting. The two firms sell horizontally differentiated goods and compete in prices. When the foreign market is significantly larger than the domestic one, the home firm gains if it is unable to price discriminate; its desire to not deviate too far from its optimal monopoly price in the domestic market makes it (credibly) less aggressive in price competition abroad which softens price competition and raises profits. On the other hand, when the foreign market is not significantly larger, it is optimal for the home country to forbid parallel imports since international price discrimination yields higher profits to the home firm. We draw out the implications of the two types of parallel import policies for global welfare.

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File URL: http://www.accessecon.com/pubs/VUECON/vu11-w17.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 1117.

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Date of creation: Sep 2011
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Handle: RePEc:van:wpaper:1117

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

Related research

Keywords: Parallel Imports; Exports; Trade Policy; Oligopoly; Horizontal Product Differentiation; Market Structure; Welfare;

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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. Ganslandt, Mattias & Maskus, Keith E., 2007. "Vertical distribution, parallel trade, and price divergence in integrated markets," European Economic Review, Elsevier, vol. 51(4), pages 943-970, May.
  3. Hoernig, Steffen & Pita Barros, Pedro Luis & Valletti, Tommaso, 2001. "Universal Service and Entry: the Role of Uniform Pricing and Coverage Constraints," CEPR Discussion Papers 2789, C.E.P.R. Discussion Papers.
  4. 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.
  5. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, vol. 23(9), pages 1269-1284, 09.
  6. Tommaso Valletti & Stefan Szymanski, 2006. "Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis," CEIS Research Paper 75, Tor Vergata University, CEIS.
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  8. 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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  11. 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.
  12. 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.
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  15. Horst Raff & Nicolas Schmitt, 2005. "Why Parallel Trade may Raise Producers Profits," CESifo Working Paper Series 1503, CESifo Group Munich.
  16. Smith, Alasdair & Venables, Anthony J., 1988. "Completing the Internal Market in the European Community: Some Industry Simulations," CEPR Discussion Papers 233, C.E.P.R. Discussion Papers.
  17. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, vol. 56(1), pages 233-245, January.
  18. Venables, Anthony J., 1990. "The economic integration of oligopolistic markets," European Economic Review, Elsevier, vol. 34(4), pages 753-769, June.
  19. Gene M. Grossman & Edwin L.-C. Lai, 2008. "Parallel imports and price controls," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 378-402.
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  21. Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May.
  22. Gene M. Grossman & Edwin C.-L. Lai, 2006. "Parallel Imports and Price Controls," NBER Working Papers 12423, National Bureau of Economic Research, Inc.
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Cited by:
  1. Kamal Saggi, 2011. "Market power in the global economy: the exhaustion and protection of intellectual property," Vanderbilt University Department of Economics Working Papers 1114, Vanderbilt University Department of Economics.

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