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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
    as

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    File URL: http://www.dis.uniroma1.it/~bibdis/RePEc/aeg/wpaper/2011-05.pdf
    File Function: First version, 2011
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    References listed on IDEAS

    as
    1. 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.
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    3. Li, Changying & Robles, Jack, 2007. "Product innovation and parallel trade," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 417-429, April.
    4. 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.
    5. 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.
    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. Keith E. Maskus & Yongmin Chen, 2004. "Vertical Price Control and Parallel Imports: Theory and Evidence," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 551-570, September.
    8. 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.
    9. Raff, Horst & Schmitt, Nicolas, 2007. "Why parallel trade may raise producers' profits," Journal of International Economics, Elsevier, vol. 71(2), pages 434-447, April.
    10. J. S. Chard & C. J. Mellor, 1989. "Intellectual Property Rights and Parallel Imports," The World Economy, Wiley Blackwell, vol. 12(1), pages 69-84, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Parallel trade; Intellectual Property Rights; R&D investment; Vertical contract; Regulation;

    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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