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Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets


  • Ganslandt, Mattias

    () (The Research Institute of Industrial Economics)

  • Maskus, Keith E.

    () (Department of Economics)


We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets that are integrated at the distributor level by parallel imports (PI). The manufacturing firm needs to set these two prices to balance three competing interests: restricting competition in the PI-recipient market, avoiding resource wastes due to actual trade, and reducing the double-markup problem in the PI-source nation. These trade-offs imply the counterintuitive result that both wholesale and retail prices could diverge as a result of declining trading costs, even as the volume of PI increases. Thus, in some circumstances it may be misleading to think of PI as an unambiguous force for price integration.

Suggested Citation

  • Ganslandt, Mattias & Maskus, Keith E., 2005. "Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets," Working Paper Series 639, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:0639

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    References listed on IDEAS

    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.
    2. 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.
    3. Richardson, Martin, 2002. "An elementary proposition concerning parallel imports," Journal of International Economics, Elsevier, vol. 56(1), pages 233-245, January.
    4. Raff, Horst & Schmitt, Nicolas, 2006. "Exclusive dealing and common agency in international markets," Journal of International Economics, Elsevier, vol. 68(2), pages 485-503, March.
    5. Raff, Horst & Schmitt, Nicolas, 2005. "Endogenous vertical restraints in international trade," European Economic Review, Elsevier, vol. 49(7), pages 1877-1889, October.
    6. Keith E. Maskus, 2000. "Parallel Imports," The World Economy, Wiley Blackwell, vol. 23(9), pages 1269-1284, September.
    7. Yongmin Chen, 2005. "Vertical Disintegration," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 209-229, March.
    8. Friberg, Richard & Martensen, Kaj, 2001. "Endogenous Market Segmentation and the Law of One Price," SSE/EFI Working Paper Series in Economics and Finance 471, Stockholm School of Economics.
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    Cited by:

    1. Andrea Mantovani & Alireza Naghavi, 2010. "Parallel Imports and Innovation in an Emerging Economy," Center for Economic Research (RECent) 038, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
    2. Frank Hefner & Mark David Witte, 2016. "Does Leaving the Eurozone Mean Leaving the Euro?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(3), pages 279-294, August.
    3. 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".
    4. Raimondos-Møller, Pascalis & Schmitt, Nicolas, 2010. "Commodity taxation and parallel imports," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 153-162, February.
    5. Frank Mueller-Langer, 2014. "Copyright and parallel trade," Chapters,in: Handbook on the Economics of Copyright, chapter 16, pages 287-310 Edward Elgar Publishing.
    6. Kamal Saggi, 2016. "Trade, Intellectual Property Rights, and the World Trade Organization," Vanderbilt University Department of Economics Working Papers 16-00014, Vanderbilt University Department of Economics.
    7. Tomaso Duso & Annika Herr & Moritz Suppliet, 2014. "The Welfare Impact Of Parallel Imports: A Structural Approach Applied To The German Market For Oral Anti‐Diabetics," Health Economics, John Wiley & Sons, Ltd., vol. 23(9), pages 1036-1057, September.
    8. Birg, Laura, 2015. "Parallel trade and reimbursement regulation," Center for European, Governance and Economic Development Research Discussion Papers 253, University of Goettingen, Department of Economics.
    9. Santanu Roy & Kamal Saggi, 2012. "Strategic competition and optimal parallel import policy," Canadian Journal of Economics, Canadian Economics Association, vol. 45(4), pages 1369-1396, November.
    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. Mazumdar, Mainak & Banerjee, Dyuti S., 2012. "On price discrimination, parallel trade and the availability of patented drugs in developing countries," International Review of Law and Economics, Elsevier, vol. 32(1), pages 188-195.
    12. Ganslandt, Mattias & Maskus, Keith E., 2007. "Wholesale Price Discrimination and Parallel Imports," Working Paper Series 702, Research Institute of Industrial Economics.
    13. Stähler, Frank & Maskus, Keith, 2013. "Retailers as Agents and the Absence of Parallel Trade," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79737, Verein für Socialpolitik / German Economic Association.
    14. Birg, Laura, 2013. "Pharmaceutical regulation at the wholesale level and parallel trade," Center for European, Governance and Economic Development Research Discussion Papers 180, University of Goettingen, Department of Economics.
    15. Li, Changying & Maskus, Keith E., 2006. "The impact of parallel imports on investments in cost-reducing research and development," Journal of International Economics, Elsevier, vol. 68(2), pages 443-455, March.
    16. Eichberger, Jürgen & Mueller-Langer, Frank, 2012. "On the Welfare Effects of Exclusive Distribution Arrangements," MPRA Paper 39691, University Library of Munich, Germany.
    17. Olena Ivus & Edwin L.-C. Lai, 2017. "Patent Exhaustion Regime and International Production Sharing: Winner and Losers?," CESifo Working Paper Series 6644, CESifo Group Munich.
    18. repec:ebl:ecbull:eb-16-00227 is not listed on IDEAS
    19. Nikolaos Zevgolis & Panagiotis Fotis, 2014. "Prohibition of parallel imports as a vertical restraint: per se approach or a misunderstanding?," European Journal of Law and Economics, Springer, vol. 38(2), pages 317-342, October.
    20. Witte, Mark David, 2009. "The currency denomination of external European Union imports after European Union expansion," Economic Systems, Elsevier, vol. 33(3), pages 245-258, September.
    21. Birg, Laura, 2013. "Pharmaceutical cost-sharing systems and savings for health care systems from parallel trade," Center for European, Governance and Economic Development Research Discussion Papers 179, University of Goettingen, Department of Economics.
    22. repec:eee:ecmode:v:69:y:2018:i:c:p:49-57 is not listed on IDEAS
    23. 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.
    24. McCalman, Phillip, 2010. "Trade policy in a "super size me" world," Journal of International Economics, Elsevier, vol. 81(2), pages 206-218, July.
    25. 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.

    More about this item


    Vertical Restraints; Parallel Imports; Market Integration;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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