This paper shows that a manufacturer may benefit from parallel trade. In addition to an intuitive condition about the effect of demand shocks, this occurs when competitive retailers must order inventories before they know the realization of demand and for products whose sale value drops at the end of the demand period. For these types of products, letting retailers trade unsold inventories generally results in larger orders placed with the manufacturer, higher manufacturer profit and higher consumer surplus. The model provides a simple explanation as to why the volume of parallel trade is now very large and accepted by manufacturers for some products such as automobiles, clothes, toys, consumer electronics, musical recordings, cosmetics and perfumes.
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Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number
2005,07.
Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
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