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Strategic Competition and Optimal Parallel Import Policy

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  • 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. Patricia M. Danzon & Y. Richard Wang & Liang Wang, 2003. "The Impact of Price Regulation on the Launch Delay of New Drugs - Evidence from Twenty-Five Major Markets in the 1990s," NBER Working Papers 9874, National Bureau of Economic Research, Inc.
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  6. 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.
  7. Raff, Horst & Schmitt, Nicolas, 2005. "Why Parallel Trade May Raise Producers' Profits," Economics Working Papers 2005,07, Christian-Albrechts-University of Kiel, Department of Economics.
  8. 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.
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  12. Tommaso Valletti & Stefan Szymanski, 2006. "Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis," CEIS Research Paper 75, Tor Vergata University, CEIS.
  13. 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.
  14. Venables, Anthony J., 1990. "The economic integration of oligopolistic markets," European Economic Review, Elsevier, vol. 34(4), pages 753-769, June.
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  16. 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.
  17. Ganslandt, Mattias & Maskus, Keith E., 2005. "Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets," Working Paper Series, Research Institute of Industrial Economics 639, Research Institute of Industrial Economics.
  18. 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.
  19. 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.
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  22. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, vol. 56(1), pages 233-245, January.
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Cited by:
  1. 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.
  2. Kamal Saggi, 2013. "The regional exhaustion of intellectual property," Vanderbilt University Department of Economics Working Papers 13-00011, Vanderbilt University Department of Economics.
  3. Kamal Saggi, 2013. "Market Power in the Global Economy: The Exhaustion and Protection of Intellectual Property," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 123(567), pages 131-161, 03.

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