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Parallel imports, product innovation and market structures

Author

Listed:
  • Hwang, Hong
  • Peng, Cheng-Hau
  • Shih, Pei-Cyuan

Abstract

This paper sets up a two-country model in which there is one domestic manufacturer authorizing its product to a distributor in a foreign country to investigate the effect of parallel imports (PI) on product innovation of the former. The distributor can sell the product not only to its own market (i.e., the foreign market) but also back to the domestic market if parallel imports are allowed by the domestic government. We find that if the manufacturer adopts a two-part tariff pricing scheme when selling its output to the foreign distributor, permitting PI necessarily decreases the manufacturer's product innovation. This result however is very sensitive to market structures. If the domestic market becomes duopolistic or oligopolistic, the above result is definitely reversed—PI has a positive effect on the manufacturer's product innovation. Finally, if there are more than one distributor in the foreign market, parallel imports may increase or decrease product innovation depending on the consumers' quality valuations in the two countries.

Suggested Citation

  • Hwang, Hong & Peng, Cheng-Hau & Shih, Pei-Cyuan, 2014. "Parallel imports, product innovation and market structures," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 237-245.
  • Handle: RePEc:eee:reveco:v:34:y:2014:i:c:p:237-245
    DOI: 10.1016/j.iref.2014.08.003
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    References listed on IDEAS

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    1. Matteucci, Giorgio & Reverberi, Pierfrancesco, 2014. "Parallel trade, product quality, and welfare," Economics Letters, Elsevier, vol. 122(2), pages 258-262.
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    Citations

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    Cited by:

    1. ISHIKAWA Jota & MORITA Hodaka & MUKUNOKI Hiroshi, 2015. "Parallel Imports and Repair Services," Discussion papers 15060, Research Institute of Economy, Trade and Industry (RIETI).
    2. Hwang, Hong & Hsueh, Yi-Shan & Peng, Cheng-Hau, 2018. "Trade liberalization and product R&D in a differentiated duopoly," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 34-38.
    3. Jota Ishikawa & Hodaka Morita & Hiroshi Mukunoki, 2018. "Parallel Imports and Repair Services," CESifo Working Paper Series 6850, CESifo Group Munich.
    4. Xuan Nguyen & Chi†Chur Chao & Pasquale Sgro & Munirul Nabin, 2017. "Cross†border Travellers and Parallel Trade: Implications for Asian Economies," The World Economy, Wiley Blackwell, vol. 40(8), pages 1531-1546, August.
    5. Ma, Yan, 2015. "The product cycle hypothesis: The role of quality upgrading and market size," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 326-336.
    6. Hamelmann, Lisa & Klein, Gordon J., 2017. "Removing geo-blocking: What are the effects on innovation for vertically differentiated goods?," CAWM Discussion Papers 100, University of Münster, Center of Applied Economic Research Münster (CAWM).

    More about this item

    Keywords

    Parallel imports; Product innovation; Two-part tariff pricing; Market structure;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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