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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. Kamal Saggi & Santanu Roy, 2011. "Strategic Competition and Optimal Parallel Import Policy," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 1117, Vanderbilt University Department of Economics.
  2. Tommaso M. Valletti & Stefan Szymanski, 2006. "PARALLEL TRADE, INTERNATIONAL EXHAUSTION AND INTELLECTUAL PROPERTY RIGHTS: A WELFARE ANALYSIS -super-* ," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 54(4), pages 499-526, December.
  3. Malueg, David A. & Schwartz, Marius, 1994. "Parallel imports, demand dispersion, and international price discrimination," Journal of International Economics, Elsevier, Elsevier, vol. 37(3-4), pages 167-195, November.
  4. 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.
  5. Grossman, Gene & Lai, Edwin, 2006. "Parallel Imports and Price Controls," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5779, C.E.P.R. Discussion Papers.
  6. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, Elsevier, vol. 56(1), pages 233-245, January.
  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. Smith, Alasdair & Venables, Anthony J., 1988. "Completing the internal market in the European Community : Some industry simulations," European Economic Review, Elsevier, Elsevier, vol. 32(7), pages 1501-1525, September.
  9. Ganslandt, Mattias & Maskus, Keith E., 2007. "Vertical distribution, parallel trade, and price divergence in integrated markets," European Economic Review, Elsevier, Elsevier, vol. 51(4), pages 943-970, May.
  10. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  11. Keith E. Maskus & Yongmin Chen, 2004. "Vertical Price Control and Parallel Imports: Theory and Evidence," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 12(4), pages 551-570, 09.
  12. Valletti, Tommaso M., 2006. "Differential pricing, parallel trade, and the incentive to invest," Journal of International Economics, Elsevier, Elsevier, vol. 70(1), pages 314-324, September.
  13. Markusen, James R. & Venables, Anthony J., 1988. "Trade policy with increasing returns and imperfect competition : Contradictory results from competing assumptions," Journal of International Economics, Elsevier, Elsevier, vol. 24(3-4), pages 299-316, May.
  14. Hoernig, Steffen & Pita Barros, Pedro Luis & Valletti, Tommaso, 2001. "Universal Service and Entry: the Role of Uniform Pricing and Coverage Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2789, C.E.P.R. Discussion Papers.
  15. Anton, James J. & Vander Weide, James H. & Vettas, Nikolaos, 2002. "Entry auctions and strategic behavior under cross-market price constraints," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 20(5), pages 611-629, May.
  16. Yongmin Chen, 2005. "Vertical Disintegration," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 14(1), pages 209-229, 03.
  17. Kamal Saggi & Santanu Roy, 2011. "Equilibrium Parallel Import Policies and International Market Structure," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 1113, Vanderbilt University Department of Economics.
  18. Venables, Anthony J., 1990. "The economic integration of oligopolistic markets," European Economic Review, Elsevier, Elsevier, vol. 34(4), pages 753-769, June.
  19. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  20. Li, Changying & Maskus, Keith E., 2006. "The impact of parallel imports on investments in cost-reducing research and development," Journal of International Economics, Elsevier, Elsevier, vol. 68(2), pages 443-455, March.
  21. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 23(9), pages 1269-1284, 09.
  22. Szymanski, Stefan & Valletti, Tommaso, 2005. "Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5022, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Kamal Saggi, 2013. "The regional exhaustion of intellectual property," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 13-00011, Vanderbilt University Department of Economics.
  2. 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.
  3. Kamal Saggi & Santanu Roy, 2011. "Strategic Competition and Optimal Parallel Import Policy," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 1117, Vanderbilt University Department of Economics.

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