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

  • 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)

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    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.

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    File URL: http://www.dis.uniroma1.it/~bibdis/RePEc/aeg/wpaper/2011-05.pdf
    File Function: First version, 2011
    Download Restriction: no

    Paper provided by Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza" in its series DIS Technical Reports with number 2011-05.

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    Date of creation: May 2011
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    Handle: RePEc:aeg:wpaper:2011-5
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    1. Margaret K. Kyle, 2007. "Pharmaceutical Price Controls and Entry Strategies," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 88-99, February.
    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. Raff, Horst & Schmitt, Nicolas, 2005. "Why Parallel Trade May Raise Producers' Profits," Economics Working Papers 2005,07, Christian-Albrechts-University of Kiel, Department of Economics.
    4. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    5. Maskus, Keith E. & Yongmin Chen, 2000. "Vertical price control and parallel imports - theory and evidence," Policy Research Working Paper Series 2461, The World Bank.
    6. Panos Kanavos & Joan Costa-Font, 2005. "Pharmaceutical parallel trade in Europe: stakeholder and competition effects," Economic Policy, CEPR;CES;MSH, vol. 20(44), pages 751-798, October.
    7. Szymanski, Stefan & Valletti, Tommaso, 2005. "Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis," CEPR Discussion Papers 5022, C.E.P.R. Discussion Papers.
    8. J. S. Chard & C. J. Mellor, 1989. "Intellectual Property Rights and Parallel Imports," The World Economy, Wiley Blackwell, vol. 12(1), pages 69-84, 03.
    9. 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.
    10. Li, Changying & Robles, Jack, 2007. "Product innovation and parallel trade," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 417-429, April.
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