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Strategic Competition and Optimal Parallel Import Policy

  • Kamal Saggi

    ()

    (Department of Economics, Vanderbilt University)

  • Santanu Roy

    ()

    (Department of Economics, Southern Methodist University)

This paper shows that parallel import policy can act as an instrument of strategic trade policy. We demonstrate this result in two-country international duopoly where a domestic monopolist competes with a rival firm in the foreign market if it chooses to incur the fixed investment cost of exporting. The two firms sell horizontally differentiated goods and compete in prices. When the foreign market is significantly larger than the domestic one, the home firm gains if it is unable to price discriminate; its desire to not deviate too far from its optimal monopoly price in the domestic market makes it (credibly) less aggressive in price competition abroad which softens price competition and raises profits. On the other hand, when the foreign market is not significantly larger, it is optimal for the home country to forbid parallel imports since international price discrimination yields higher profits to the home firm. We draw out the implications of the two types of parallel import policies for global welfare.

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File URL: http://www.accessecon.com/pubs/VUECON/vu11-w17.pdf
File Function: First version, September 2011
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1117.

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Date of creation: Sep 2011
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Handle: RePEc:van:wpaper:1117
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  9. Kamal Saggi & Santanu Roy, 2011. "Strategic Competition and Optimal Parallel Import Policy," Vanderbilt University Department of Economics Working Papers 1117, Vanderbilt University Department of Economics.
  10. Kamal Saggi & Santanu Roy, 2011. "Equilibrium Parallel Import Policies and International Market Structure," Vanderbilt University Department of Economics Working Papers 1113, Vanderbilt University Department of Economics.
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  17. Tommaso M. Valletti & Stefan Szymanski, 2006. "PARALLEL TRADE, INTERNATIONAL EXHAUSTION AND INTELLECTUAL PROPERTY RIGHTS: A WELFARE ANALYSIS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 499-526, December.
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