Retailers’ parallel importation and service provision in a supply chain: Incentives and impacts

We adopt a game-theoretic approach to explore the dynamics between retailers' strategic decisions regarding parallel importation and service provision. In a setting where a manufacturer distributes products through a retailer in a low willingness-to-pay market (L) and directly in a high willingness-to-pay market (H), we analyze the impact of the retailer's choice to provide services in market L while the retailer engages in parallel importation from market L to H. Our results show that parallel importation leads to a reduction in the retailer's service level; an increase in consumers' willingness-to-pay in market H further decreases the service level in market L. Moreover, when the retailer conducts parallel importation, the manufacturer reacts by raising the wholesale price in market L while lowering the retail price in market H. When the retailer provides service while conducting parallel importation, the manufacturer lowers the wholesale price in market L and the retail price in market H. In addition, while the retailer's service provision weakens its incentive for parallel importation, it also exacerbates conflicts with the manufacturer regarding parallel importation. Although the combined strategy with both parallel importation and service provision increases overall consumer surplus, consumers in market L consistently experience negative effects due to parallel importation. Interestingly, despite the markets being interconnected through parallel importation, the retailer's service provision has no significant impact on the manufacturer's potential service level in market H.