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Vertical Pricing and Parallel Imports

Author

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  • Yongmin Chen
  • Keith Maskus

Abstract

We generalize an earlier model of international vertical pricing to explain key features of parallel imports, or unauthorized trade in legitimate goods. When a manufacturer (or trademark owner) sells its product through an independent agent in one country, the agent may find it profitable to engage in parallel trade, selling the product to another country without the authorization of the manufacturer. Although parallel imports can be deterred when the manufacturer's wholesale price is sufficiently high, there is a trade-off between improving vertical pricing efficiency and reducing parallel imports. In equilibrium, parallel imports can come from a country with higher retail prices, which is consistent with some factual data. While countries have varying interests in such a policy, restricting parallel imports tends to increase global welfare when trade cost is high, but may reduce welfare when trade cost is low. This finding suggests that open parallel trading regimes may be most appropriate within regional trade agreements.

Suggested Citation

  • 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.
  • Handle: RePEc:taf:jitecd:v:14:y:2005:i:1:p:1-18
    DOI: 10.1080/0963819042000333225
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    Citations

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    Cited by:

    1. Ying Xiao & Udatta Palekar & Yunchuan Liu, 2011. "Shades of gray—the impact of gray markets on authorized distribution channels," Quantitative Marketing and Economics (QME), Springer, vol. 9(2), pages 155-178, June.
    2. 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.
    3. David Granlund & Miyase Koksal-Ayhan, 2015. "Parallel imports and a mandatory substitution reform: a kick or a muff for price competition in pharmaceuticals?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(9), pages 969-983, December.
    4. Brekke, Kurt R. & Holmås, Tor Helge & Straume, Odd Rune, 2015. "Price regulation and parallel imports of pharmaceuticals," Journal of Public Economics, Elsevier, vol. 129(C), pages 92-105.
    5. Raimondos-Møller, Pascalis & Schmitt, Nicolas, 2010. "Commodity taxation and parallel imports," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 153-162, February.
    6. Zhang, Jianqiang, 2016. "The benefits of consumer rebates: A strategy for gray market deterrence," European Journal of Operational Research, Elsevier, vol. 251(2), pages 509-521.
    7. Granlund, David & Yesim Köksal, Miyase, 2012. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals - What’s to Blame? Derogation or Perception?," HUI Working Papers 59, HUI Research.
    8. Granlund, David & Köksal, Miyase Yesim, 2011. "Parallel Imports and Mandatory Substitution Reform - A Kick or A Muff for Price Competition in Pharmaceuticals?," HUI Working Papers 49, HUI Research.
    9. Granlund, David & Yesim Köksal, Miyase, 2011. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals - What’s to Blame? Derogation or Perception?," Umeå Economic Studies 831, Umeå University, Department of Economics.
    10. Laura Birg, 2015. "Externalities of National Pharmaceutical Policy when Markets are Integrated through Parallel Trade," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 558-574, August.
    11. Granlund, David & Yesim Köksal, Miyase, 2011. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals. What's blame? Derogation or perception?," Working Papers in Economics 499, University of Gothenburg, Department of Economics.
    12. Granlund, David, 2012. "The effect of pharmacies’ right to negotiate discounts on the market share of parallel imported pharmaceuticals," HUI Working Papers 75, HUI Research.
    13. Ganslandt, Mattias & Maskus, Keith E., 2007. "Vertical distribution, parallel trade, and price divergence in integrated markets," European Economic Review, Elsevier, vol. 51(4), pages 943-970, May.
    14. Ganslandt, Mattias & Maskus, Keith E., 2007. "Wholesale Price Discrimination and Parallel Imports," Working Paper Series 702, Research Institute of Industrial Economics.
    15. Hsiu-Li Chen, 2009. "Gray Marketing: Does It Hurt the Manufacturers?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(1), pages 23-35, March.
    16. repec:ebl:ecbull:eb-16-00227 is not listed on IDEAS
    17. Granlund, David & Yesim Köksal, Miyase, 2011. "Parallel Imports and Mandatory Substitution Reform: A kick or a muff for price competition in pharmaceuticals," Working Papers in Economics 496, University of Gothenburg, Department of Economics.
    18. Costa-i-Font, Joan & Kanavos, Panos, 2007. "Medicines in parallel trade in the European Union: a gravity specification," LSE Research Online Documents on Economics 28787, London School of Economics and Political Science, LSE Library.
    19. Shen Guo & Bin Hu & Hai Zhong, 2013. "Impact of parallel trade on pharmaceutical firm’s profits: rise or fall?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 14(2), pages 345-355, April.
    20. Maskus, Keith E. & Stähler, Frank, 2014. "Retailers as agents and the limits of parallel trade," European Economic Review, Elsevier, vol. 70(C), pages 186-196.

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