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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

We develop a North-South model in which a firm that enjoys monopoly status in the North (by virtue of a patent or a trademark) has the incentive to price discriminate internationally because Northern consumers value its product more than Southern ones. While North's policy regarding the territorial exhaustion of intellectual property rights (IPR) determines whether the firm can exercise market power across regions, Southern policy regarding the protection of IPR determines the firm's monopoly power within the South. In equilibrium, each region's policy takes into account the firm's pricing strategy, its incentive to export, and the other region's policy stance. Major results are: (i) the North is more likely to choose international exhaustion if the South protects IPR whereas the South is more willing to offer such protection if the North implements national exhaustion; (ii) the firm values IPR protection less than the freedom to price discriminate internationally if and only if its quality advantage over Southern imitators exceeds a certain threshold; and (iii) requiring the South to protect IPR increases global welfare iff such protection is necessary for inducing the firm to export to the South.

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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 12-00005.

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Date of creation: 06 Feb 2012
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Handle: RePEc:van:wpaper:vuecon-12-00005

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

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

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  1. 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.
  2. Santanu Roy & Kamal Saggi, 2012. "Strategic competition and optimal parallel import policy," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 45(4), pages 1369-1396, November.
  3. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, Elsevier, vol. 56(1), pages 233-245, January.
  4. Branstetter, Lee & Fisman, Ray & Foley, C. Fritz & Saggi, Kamal, 2011. "Does intellectual property rights reform spur industrial development?," Journal of International Economics, Elsevier, Elsevier, vol. 83(1), pages 27-36, January.
  5. 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.
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  7. Olena Ivus, 2011. "Trade-related intellectual property rights: industry variation and technology diffusion," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 44(1), pages 201-226, February.
  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, Wiley Blackwell, vol. 54(4), pages 499-526, December.
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  11. 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.
  12. Ivus, Olena, 2010. "Do stronger patent rights raise high-tech exports to the developing world?," Journal of International Economics, Elsevier, Elsevier, vol. 81(1), pages 38-47, May.
  13. Smith, Pamela J., 1999. "Are weak patent rights a barrier to U.S. exports?," Journal of International Economics, Elsevier, Elsevier, vol. 48(1), pages 151-177, June.
  14. 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, MIT Press, vol. 8(2-3), pages 326-353, 04-05.
  15. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 23(9), pages 1269-1284, 09.
  16. Nunnenkamp, Peter & Spatz, Julius, 2004. "Intellectual property rights and foreign direct investment : a disaggregated analysis," Open Access Publications from Kiel Institute for the World Economy, Kiel Institute for the World Economy (IfW) 3395, Kiel Institute for the World Economy (IfW).
  17. 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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  19. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 870-75, September.
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Cited by:
  1. Ray Chaudhuri, A., 2014. "Acquisitions by Multinationals and Trade Liberalization," Discussion Paper, Tilburg University, Center for Economic Research 2014-006, Tilburg University, Center for Economic Research.

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