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Parallel trade and its impact on incentives to invest in product quality

Author

Listed:
  • Giorgio Matteucci

    (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma)

  • Pierfrancesco Reverberi

    (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma)

Abstract

It is widely argued that international arbitrage, or parallel trade (PT), trades off static against dynamic efficiency so that, compared with a national exhaustion regime of intellectual property rights, worldwide consumer surplus rises at the expense of R&D investment. We show that this common wisdom is rather the exception than the rule. Indeed, quality investment often rises under international exhaustion, since it strengthens vertical differentiation between the original product and parallel imports. In this case, there is no trade-off at all, so that encouraging PT improves welfare, or the reverse trade-off occurs where investment increases and consumer surplus declines, while PT has ambiguous welfare effects. We find that, when allowed to use dual pricing, the R&D firm artificially restores national exhaustion. We also find that the expected trade-off never occurs under non-linear pricing and when the foreign country is regulated, although in such cases welfare rises when PT is banned.

Suggested Citation

  • Giorgio Matteucci & Pierfrancesco Reverberi, 2011. "Parallel trade and its impact on incentives to invest in product quality," DIS Technical Reports 2011-05, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  • Handle: RePEc:aeg:wpaper:2011-5
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Parallel trade; Intellectual Property Rights; R&D investment; Vertical contract; Regulation;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • F15 - International Economics - - Trade - - - Economic Integration
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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