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Vertical distribution, parallel trade, and price divergence in integrated markets

  • Ganslandt, Mattias
  • Maskus, Keith E.

We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets that are integrated at the distributor level by parallel imports (PI). The manufacturing firm needs to set these two prices to balance three competing interests: restricting competition in the PI-recipient market, avoiding resource wastes due to actual trade, and reducing the double-markup problem in the PI-source nation. These trade-offs imply the counterintuitive result that both wholesale and retail prices could diverge as a result of declining trading costs, even as the volume of PI increases. Thus, in some circumstances it may be misleading to think of PI as an unambiguous force for price integration.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 51 (2007)
Issue (Month): 4 (May)
Pages: 943-970

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Handle: RePEc:eee:eecrev:v:51:y:2007:i:4:p:943-970
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  1. Yongmin Chen, 2005. "Vertical Disintegration," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 209-229, 03.
  2. 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.
  3. Yongmin Chen & Keith Maskus, 2005. "Vertical Pricing and Parallel Imports," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 14(1), pages 1-18.
  4. Horst Raff & Nicolas Schmitt, 2000. "Endogenous Vertical Restraints in International Trade," CESifo Working Paper Series 284, CESifo Group Munich.
  5. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, vol. 56(1), pages 233-245, January.
  6. Raff, Horst & Schmitt, Nicolas, 2006. "Exclusive dealing and common agency in international markets," Journal of International Economics, Elsevier, vol. 68(2), pages 485-503, March.
  7. Friberg, Richard & Martensen, Kaj, 2001. "Endogenous Market Segmentation and the Law of One Price," SSE/EFI Working Paper Series in Economics and Finance 471, Stockholm School of Economics.
  8. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, vol. 23(9), pages 1269-1284, 09.
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